- What is the implied cost (interest rate) of skipping a 2% discount on suppliers for a $1,000 invoice? (Easy: check out Section 15-9 in the textbook) (0.5 pts.)
- Given what you have learned about working capital management and financial planning, is Nelson’s Jones’ estimate that a $350,000 line of credit will be sufficient for 2007 accurate? (7 pts.)
- Create an Excel workbook with forecasted balance sheet, income statement and cash flow for 2007
- Assume two scenarios, 1) with discounts from suppliers taken and 2) without
- Based on Jones’ net income for 2006 and assuming it is constant going forward, how long will it take for Jones to pay off a $350,000 loan? (0.5 pts.)
- What could Jones do to reduce the size of the line of credit he needs? (2 pts.)
- Support your recommendation(s)
- (Hint: What rate of growth can Jones pursue that is sustainable? Does he need to change his capital structure?)
Assumptions
1.Sales volume for 2007 will be $2.7m
2.The historical relations that prevailed in 2004-06 will continue in 2007.
1.Operating expense remains at 15.5% of sales
2.Interest expense is assumed to be flat at $31,000
3.Accounts receivable remains at 43 days of sales.
4.Inventory remains at 76 days of COGS
5.$24,000 of long-term debt principal is repaid during 2007
6.Cash, PP&E, Accrued expenses dollar balances are unchanged in 2007. In the case of PP&E this assumes that depreciation = capex in 2007.
3.COGs will be flat at 81.1% if Jones takes 100% of the discounts available in 2007 but will increase 2.0% to 83.1% in 2007 if Jones does not take the discounts available.
