Financial Management

JACKSON AUTOMOTIVE SYSTEMS

JACKSON AUTOMOTIVE SYSTEMS

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Name of the School (University)

  1. Why can’t profitable company like Jackson repay its loan on time? What major company developments between August 2012 and May 2013 contribute to this situation? Prepare a sources and uses of funds statement for Aug 2012 through May 2013.

Profitable companies like Jackson choose not to repay their loan on time because of a number of reasons. Firstly, they choose not to repay loans on time where there are more pressing needs within the company, for instance, research and product development or attracting, hiring and retaining key employees. This is because repayment of the debts during such a time tends to harm the future of the company. For instance, Jackson experienced fast growth as well as record production because the manager, Edwards, paid close attention to innovation. The company used the money in the design of energy efficient auto systems which in turn helped in attracting new customers for the company’s cutting-edge products. The ability of the company to forestall debt repayment during such times would provide extra cash to be used in growing the business because the excess profits are better used in building the business than repaying the debts.

Secondly, the company chose to delay the repayment of the loan because some external investors would want all of their capital to stay within the business until their accrued or principal dividends are paid. Therefore, the repayment of the loan to the creditor would create financial extremis for Jackson. This is why the company is choosing to restructure the loan and delay its repayment. For instance, the company chose to repurchase stock from the dissident shareholders to result in a 40 percent reduction to the total number of common shares outstanding after completing the repurchase. In addition, the company failed to repay the loan because it needed cash to service normal operations. For instance, the company financed the purchase of a new equipment. Also, the company needed to conserve cash during the poor economic conditions. The company needed to replace the worn out components of the equipment as soon as possible to avoid any sort of disruption in production in the foreseeable future. Finally, the investors prefer seeing money growing the business than going out in the form of debt repayments and hence would like to see the debts converted into equity instead of being repaid in cash.

Sources and uses of funds statement for Aug 2012 through May 2013

September

November

December

February

Net income

Add back non-cash expenses

0

Depreciation and amortization

(Increase) decrease in current assets

0

Accounts receivable

0

Inventory

0

Increase (decrease in current liabilities

0

Accounts payable

0

Customer advance payments

0

0

0

0

0

0

0

Other accrued expenses

0

0

0

0

0

0

0

0

Accued taxes

0

Net cash provided by operating activities

0

Cash flows from investing activities

0

Purchase of equipment

0

0

0

0

0

0

0

0

0

Net cash used in investing activities

0

0

0

0

0

0

0

0

0

0

Cash flows from financing activities

0

proceeds from line of credit

0

0

0

0

0

0

0

0

0

Net cash provided in financing activities

0

0

0

0

0

0

0

0

0

Net increase (decrease) in cash

6. Should the bank extend the maturity of the current loan and approve the additional loan? What terms and conditions should the bank impose to reduce the risks of the loan to the bank?

The bank should extend the maturity of the current loan and approve the additional loan because of a number of reasons. Firstly, the relevant operating and financial information of the company indicate that it is profitable enough to meet the repayment of both loans, for instance, the profits for the past months are satisfactory. In addition, the company has the ability of meeting its shipments forecasts for the remaining part of the years. This implies that products will be delivered in time hence more sales revenues. Also, the company has put in place conservative dividend-payout policy which implies more cash are available at the disposal of the company. Finally, from the balance sheet, it is evident that the company is liquid enough to meet its current obligations as its current assets are higher than current liabilities.

The terms and condition of the loan should be to oblige the company to make monthly principal and interest payments. To facilitate this, the company should be required to keep its cash balance at the company where the deductions are to be made by the bank.