Case #1: Jones Electrical Distribution.
Please answer the following questions:
1) How well is Jones Electrical performing? What must Jones do well to succeed?
2) Why does this profitable company have to borrow more and more money from the bank?
3) What drove the increased in Jones’ accounts receivable and inventory balances in 2005 and
2006?
4) Is Nelson Jones accurate in his estimation that a $350,000 line of credit is sufficient for 2007? In
order to answer this question, please prepare a 2007 forecast under the following assumptions:
a) Jones takes trade discounts.
b) COGS after trade discounts is 80.5% of sales.
c) For 2007, cash (as a % of sales) remains at the 2006 level.
d) Accounts Receivable can be calculated based on the 2006 collection period.
e) Accounts Payable are based on the assumption that Jones will have a days payable
period of 10 days in 2007.
f) Operating expenses (as a % of sales) will remain the same as in 2006.
g) Inventory is assumed to be 16.9% of sales.
h) Assume a tax rate of 36%.
i) Assume all debt (Verden debt and line of credit) has an interest cost of 8% per
annum.)
j) Assume that net PP&E (Property, Plant, and Equipment) will be equal to 5.26% of
sales in 2007.
k) Assume that Accrued Expenses remain constant at 2006 $ values.
l) Use sales growth as implied by Southern Bank’s investigator (Page 2 of the case).
5) How does Jones’ short-term financing requirement change if he foregoes the discounts the
trade discounts?
6) Would you as Mr. Montrose agree to lend Jones the money needed? Explain.
7) What are the alternatives available to Mr. Jones if Mr. Montrose refuses his request for an
increased credit line?