UNIVERSIDAD ESAN

FACULTAD DE DERECHO Y CIENCIAS SOCIALES

Carrera de Derecho Corporativo

JACKSON AUTOMOTIVE SYSTEMS

Trabajo que como parte del curso de Evaluación de las Inversiones presentan los
alumnos:

Dante Gavilán Cunyarachi |15200221

Diego Eduardo Rodríguez Pereda | 13100434

Lesly Arana Jurado | 15100046

Yulia Valeria Meza Changanaquí | 15100225

Renato Héctor Vidaurre Rodríguez | 10100637

Profesor: Guillermo Dávila Jaramillo

Lima

1 de mayo del 2020

 Jackson Automotive
Systems

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 August
2012 through May 2013.

Despite being a profitable company, Jackson is unable to repay its loan on time
because it was a small private OEM, located in Jackson Michigan and the
production of its lines dependent on sophisticated and expensive precision
equipment, its clients being local accredited automotive manufacturers, located
near the Michigan area, the designated area that houses the largest number of
OEMs in the country; industry that by the time of the company's loan in 2013, had
already been seriously affected by the 2008 crisis, having a severe depression in
its production, having a drop in sales of more than 30% and operating at a capacity
At just 55%, they are facing bankruptcy at many companies in the OEM industry
and drawing strong foreign competition in the United States. The economic
recovery was slow and had high prices for raw materials.

In this situation of the company not being able to pay its debt, contributing in
August 2012 and May 2013, Jackson Automotive Systems will make the decision
(in search of economic improvement) to repurchase the shares of a group of
dissident shareholders using the 5 million borrowing dollars from the bank, planning
to use them in conjunction with another $ 5 million in excess of their balance, to buy
one million Jackson shares, which had the par value of $ 1, looking for when
complete the repurchase of shares, this would result in a 40% reduction in the
number of common shares of the company; however, the conditions of the loan
oblige Jackson to make a monthly interest payment at an annual interest rate of
6%, (0.5% monthly) on the principal, and to pay off the loan amount (the principal),
at the end of June 2013. Unfortunately, at the beginning of June, Edward realized
that he was facing a difficult situation, not only did he not have money to face the
loan that matured at the end of June, but he also had the need to expand credit to
support operations ordinary of your company. It is throughout this chain of events
that Jackson Automotive Systems cannot repay its loan on time.
According to this financial statement, the most important use of cash was the stock
repurchase, which almost represent 65% of the total use of funds. And doing so, all
the sources in that time weren’t enough, because by May 2013, the cash
decreased on 3,356 thousand of dollars. Another important feature of its operations
is that almost 32,5% of the financing was with debt, increasing its leverage level
and jeopardizing its capital.

2. Why does the company need a new loan? How urgent is the need for the
additional borrowing?

The company needs a new additional loan because it needed to support the
ordinary operations of its company and finance the purchase of new equipment.
These additional loans are urgent and important since Jackson had spent very little
on new equipment purchases in recent years due to the crisis in search of savings,
however, some vital components of the equipment had completely worn out over
time and It had become critical and urgent to replace it as soon as possible to avoid
any disruption to production in the foreseeable future.

3. Prepare monthly cash budget and pro forma income statements and
balance sheets for the last four months of fiscal year. Do the cash budgets
and pro forma financial statements yield the same results? Why or why not?

Pro Forma Balance Sheets, June to October 2013 (thousands of dollars)

June July August September

Δ Shareholders' equity 623 443 320 -752
Δ Total assets -2,000 2,172 485 -8,296

No, they don’t yield the same. As we can see, the Cash Budget has bigger
amounts of money in terms of transactions than the financial statements. This
happens because in the financial statements all the sales and costs or expenses
are registered, even if they haven’t been done yet. This is called the accrual
principle, which stablish that all transactions have to be registered in the moment of
the establishment rather than the date of payment or collection.
4. Based on your forecasts and analysis of Jackson’s credit, is the company
able to repay its loan at the end of the fiscal year? What are the risks
associated with the proposed loan?

JACKSON AUTOMOTIVE SYSTEMS

Pro Forma Cash Budget, June to October 2013 (thousands of dollars)
June July August September
Beginning Cash Balance 4,994 1,627 6,536 7,034

Cash Receipts
Collections of accounts receivable 3,744 10,881 6,474 7,201
Interest income 8 3 11 12
Bank loan 0 2,400 0 0
Total cash inflow 3,752 13,284 6,485 7,213

Cash Disbursements
Payments of accounts payable 5,969 5,200 5,200 5,200
Operating expenses 750 750 750 750
Capital expenditure 0 2,400 0 0
Tax payments 375 0 0 375
Interest payments 25 25 37 37
Principal payments 0 0 0 7,400
Dividend payments 0 0 0 1,200
Total cash outflow 7,119 8,375 5,987 14,962

Net cash inflow (outflow) -3,367 4,909 498 -7,749

Ending Cash Balance 1,627 6,536 7,034 -715

In my opinion, it is not in well position to repay its loan, because it will have a cash
deficit by September. But the main problem are the dividends that the company will
pay. Fort the payment of the interest, the company has cash in order to fulfill its
obligations, however this is based upon a very positive forecast of the sales,
because the company expects to sell almost the double than the initial forecast
done on 2012.
Some of the risks are the uncertainty of collect the sales from a month in the next
month and the increase of the sales. Also, as the company is operating near to its
maximum capacity, it’s probable that some failures may occur, jeopardizing the
fulfillment of the orders.

5. Critically evaluate the assumptions on which your forecasts are based and
perform sensitivity analysis on the fiscal year-end cash balance when sales
forecasts vary form expectations.

JACKSON AUTOMOTIVE SYSTEMS

Sensitivity Analysis - The Impact of Sales Drop on September Cash Balance

Original scenario
Sales Increase / Drop a
-10% -5% 0% 5% 10%
2400 -4,646 -3,281 -1,915 -550 816
1800 -4,046 -2,681 -1,315 50 1,416
Dividend

1200 -3,446 -2,081 -715 650 2,016

600 -2,846 -1,481 -115 1,250 2,616
0 -2,246 -881 485 1,850 3,216
As we can see, the only scenario where there is no deficit of cash maintaining the
actual forecast is if the company doesn’t pay dividends on September. The main
reason for giving dividends as the case says is an economical recovery, changing
its conservative behavior regarding dividends. However, in the current scenario,
given the assumptions, the company is not well suited to distribute dividends. Just
in the case that the sales increase in at least 5% each following month, then the
company can give dividends.

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?

In the current situation, no. The bank shouldn’t extend the current loan, because by
September the company will have financial troubles. Also, in the current scenario,
the interests will be higher due the new debt and extending the old one. In addition,
the dividends are very important into the cash flow, making to rise the cecesity of
cash to September.
For that reason, the bank is assuming credit default risk with Jackson.
Some of the terms I propose for the new loan in order to avoid financial problems
are:
-Pay the 5 million of old debt on July, because that month the company will
receive almost 10 million by the collect of the accounts receivable
-Get the 2.4 million of loan, but pay the principal on equal parts during the
three following months, so the last payment will be on October. Doing so, they can
pay dividends and not running out of cash.
7. Why did the company repurchase a substantial fraction of its outstanding
common stocks? What’s the impact of the repurchase on Jackson’s financial
condition?

It could be done because they needed to improve its price on the market, making
an image of a solid and profitable company. This would help Jackson to negotiate
more with the loans and access to better rates for financing its operations.
As we can see in the following image, after the repurchase of the stocks, the
profitability ratios went high, however, not driven by results, but for the decrease on
the denominator (equity).
The impact of that transaction, in simple words, was an improvement of the
financial status of the company.

8. Critically assess the company’s proposed dividend payout in September

2013. Should the bank agree with the payout? What seems to be an
appropriate amount?

That dividend, in my opinion, has no sense. First, the company is having struggles
with fulfill its orders, also, they have obligations to pay first, and finally, given the
assumptions, it would end the fiscal year with a cash deficit, maybe with its line of
credit overdrawn.
In my opinion, the bank shouldn’t agree with the payout because will put the
company in struggles to pay their money back, also because the amount is not
proportional with the performance of the company.
For me, an appropriate dividends amount will be 480 thousand of dollars, so by the
end of the fiscal year, the company won’t have cash problems.