Queen 1, How well can be “Jones Power Distribution” executing? What must Jones excel to succeed?
1st Quarter From coverage percentage analysis we can see Jones electric distribution’s organization is secure business being a retailer. Revenue increase 18% and 17% in 2006 and 2007 correspondingly, with appraisal in 2007 will be twenty. 4%.
Shareholder’s equity is around 30%. Jones sustainable progress rate: g*=RT*ROA, so compare with actual product sales growth, we can make the bottom line Jones very well managed the growth through year of 2004 to 2007. Since Jones doing low margin business, thus should avoid high economical leverage ratio as interest burden will be heavy.
Q2, why does a company that has revenue of $30, 000 per year need a financial loan? From above table we can understand Jones collection period elevated step by step which will need more money support that, payables period exceed week from 06\, this will lost 2% price cut from suppliers. As Williams sales progress rate is usually high than sustainable price, so their net generating could not support increased accounts receivable and inventory.
Then this company will need bank loan to finance the increase business. Q3, What went the increase in Jones’s accounts receivable and inventory balances in june 2006 and 06\? Sales expansion drove the increase of accounts receivable and inventory balances in 2005 and 2006. Q4, Is definitely Nelson Jones’s estimate which a $350, 500 line of credit is sufficient for 3 years ago accurate?
As Jones estimated growth price in 2007 is 20% for sales, so account receivable and inventory raises as a consequence. Total $129, 1000 is needed if perhaps collection period and products on hand will not improve. As Smith accounts payable in initial quarter go beyond 37 times already, this will likely makes Williams loss 2% discount coming from suppliers, gathered 24% against 7. five per cent interest rate. So this makes sense to get Jones receive loans build inventory inside 10days payment. Total inventory change $129, 000+$120.
000=$249. 000. And so $350, 1000 line of credit is sufficient for 2007 even the financial institution set some limitations how to use the credit rating. Q5, When ever will Roberts be able to repay the line of credit? For as long term personal debt already $378, 000 in first quarter of 3 years ago, plus extra bank loan $350, 000.
Thus total credit will be $720, 000 Net gain for Roberts is $30, 000 and with steady growth rate, so Roberts need about 25 years pay back all the credit. Q6, What could Jones do to reduce how big is the line of credit this individual needs? Smith should deal with closely reduce collection period and increase inventory turn over to reduce operate capital.