Jones Electrical

1.-Is Jones Electrical Distribution a profitable business?

Yes, but the debt to Dave Verden is not letting him grow as much.

2.-Why does Mr. Jones have to borrow so much money to support his business?

Because of the growth rate that the company has which is a double digit and the debt to Dave Verden. He has to pay $24 annually plus an 8% interest rate, from an originally total of $250. He is not making enough money to pay this in 2004 and in 2005 and 2006 barely. (Before 2003 this money wasn’t debt)

3.-Prepare a pro forma income statement and a pro forma balance sheet for Jones Electrical under the assumption that 2007 sales are $2.7 million.

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Do you think a line of credit of $350,000 will meet Jones’ foreseeable requirements? Yes a line of $350 will help him out ($363 being more accurate according to my personal forecast), but according to the covenants of use of the line of credit it won’t be enough, considering the percentages that limit its use. (Less than 75% of accounts receivables and/or 50% of inventories.)

How much will he need to borrow to finance his expected sales increase? Considering the forecasting used by me and the assumptions used, $363 at the end of the year. (Each quarter should be analyzed separately because of the seasonality of the business)

4.-As Mr. Jones advisor, would you suggest that he go ahead with his anticipated expansion, taking on additional debt, or reconsider?

I would strongly believe that he should reconsider this specific arrangement due to its covenants, maybe there is another bank willing to extend a line of credit that fully satisfies his necessities. The expansion on the other hand is smart if he is able to scale COGS and operating expenses, which for the year 2006 and the first quarter of 2007 is quite the opposite.