GITAM INSTITUTE OF MANAGEMENT GITAM UNIVERSITY (Established U/S 3 of UGC Act, 1956)

VISAKHAPATNAM (2013-14)

Case analysis: Jackson automotives was founded in 1961, Edwards the president of Jackson
automotives , under the leadership of Edwards ,Jackson experienced fast growth and record production in the mid 2000s .In September 2012 Edwards decided to repurchase stock from a group of dissident shareholders . He approached Heather James at a michigan state bank where kept its cash balance, for a 5 million short-term loan to facilitate the stock repurchase .The buy back would result in a 40% reduction to the number of common shares outstanding after the repurchase was complete .To support his loan request Edwards attached documentation of backlog of sales orders ,Jackson automotives maintained strong working capital position and a conservative financial policy . Jackson automotives applied for a loan of 2.4 million to fund the acquisition of a long needed equipment , looking into the details of Jackson automotive systems an original equipment manufacturer located in Jackson Michigan they manufacture advanced heating and air conditioning systems ,engine cooling systems and various other engine parts .In 2008 financial crisis the OEM sales declined to 30% ,industry was running about 55% capacity during the financial crisis .The industry rebounded in 2010 and returned to profitability in 2011. The competition is high in the OEM segment. 1 .Jacksons selling terms were net 30 days customers placing large orders would make an advance payment to help the company finance the production. 2. Jacksons had to wait for the installation of some key electronic components for the newly designed air conditioning systems which caused a delay in the order fulfilment. 3. Work in progress reduction $ 5040000 imminently in June. The remainder of the work in progress inventories would remain stable until the end of the fiscal year. 4. Cash balance of $4994000. 5 .Edwards also emphasized that the company had adopted a conservative dividend policy since the financial crisis,company was planning to pay $1200000 in dividends in September to its shareholders. 6. Jackson did not need to purchase the equipment until August the maturity date of the existing loan was fast approaching .James urged him to formally meet the loan committee at the bank.

The important things what we need to consider for giving loan are 1.The credit history of the Jackson automotives limited? Commercial credit. Before you apply for commercial credit, you should review a credit report on your own business, if your business has been in existence for a while. You can obtain a free Business Information Report on your own business If D&B they will allow you to voluntarily obtain a listing by providing them with some basic information about your business. Most conventional lenders will expect a minimum of four or five trade experiences listed on a business report before they consider the business's creditworthiness. If you have been operating your business without credit, or with personal assets, you should consider making some trade credit purchases in order to establish a credit history for your enterprise. It's often a wise decision to obtain a credit report on yourself and your business before you apply for credit. If you discover any inaccuracies or problems, you can correct them before any damage to your loan application has occurred. If you can, find out which credit reporting company your prospective lender uses and request a report from that company.

2.The cash flows history and projections of the business?

Current assests current liabilities Net sales Inventory Cash Receivables fixed assets total assets Gross profit PBT ADD: Interest Expense LESS: Interest Income LESS: Non operating income EBIT Net income Debt Shareholder's equity Cash plus receivables

12-Aug 21,297 8,380 6,321 7,154 8,350 5,793 15374 36,671 1,327 447 0 13

12-Sep 16,661 13,394 5,969 7,364 3,328 5,969 15070 31,731 1,242 373 0 14

12-Oct 17,468 13,714 6,421 7,524 3,523 6,421 14915 32,383 1,418 502 25 6

12-Nov 17,581 13,425 6,302 7,219 4,511 5,851 14817 32,398 1,388 461 25 6

12-Dec 17,525 12,959 6,009 7,277 4,239 6,009 14699 32,224 1,314 443 25 8

13-Jan 18,145 13,141 6,170 7,097 4,878 6,170 14584 32,729 1,355 489 25 7

13-Feb 18,317 12,921 6,006 7,529 5,182 5,606 14477 32,794 1,314 433 25 8

434 295 0 28,291 14143

359 246 5000 18,337 9297

521 331 5000 18,668 9944

480 304 5000 18,973 10362

460 293 5000 19,625 10248

507 323 5000 19,588 11048

450 286 5000 19,874 10788

3. For getting a bank loan collateral should be available or the borrower should show some asset as the guarantee for the amount what he is getting here we will discuss about collateral in detail. Collateral may be defined as property that secures a loan or other debt, so that the property may be seized by the lender if the borrower fails to make proper payments on the loan. When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made. Because a creditor wants to have a priority claim against the collateral being offered to secure the loan, the creditor will search the public records to make sure that prior claims have not been filed against the collateral. If the collateral is real estate, the search of public records is often done by a title insurance company. The company prepares a "title report" that reveals any pre-existing recorded secured interests or other title defects. If the loan is secured by personal property, the creditor typically runs a "U.C.C. search" of the public records to reveal any pre-existing claims. The costs of a title search or a U.C.C. search is often passed on to the prospective borrower as part of the loan closing costs. To further limit their risks, lenders usually discount the value of the collateral so that they are not extending 100 percent of the collateral's highest market value. This relationship between the amount of money the bank lends to the value of the collateral is called the loan-to-value ratio. The type of collateral used to secure the loan will affect the bank's acceptable loan-tovalue ratio. For example, unimproved real estate will yield a lower ratio than improved, occupied real estate. These ratios can vary between lenders and the ratio may also be influenced by lending criteria other than the value of the collateral; e.g., a healthy cash flow may allow for more leeway in the loan-to-value ratio. A representative listing of loan-to-value ratios for different collateral at a small community bank is: Real estate: If the real estate is occupied, the lender might provide up to 75 percent of the appraised value. If the property is improved, but not occupied (e.g., a planned new residential subdivision with sewer and water, but no homes yet), up to 50 percent. For vacant and unimproved property, 30 percent. Inventory: A lender may advance up to 60 percent to 80 percent of value for ready-to-go retail inventory. A manufacturer's inventory, consisting of component parts and other unfinished materials, might be only 30 percent. The key factor is the merchantability of the inventory how quickly and for how much money could the inventory be sold. Accounts Receivable: You may get up to 75 percent on accounts that are less than 30 days old. Accounts receivable are typically "aged" by the borrower before a value is assigned to them. The older the account, the less value it has. Some lenders don't pay attention to the age of the accounts until they are outstanding for over 90 days, and then they may refuse to finance them. Other lenders apply a graduated scale to value the accounts so that, for

instance, accounts that are from 31-60 days old may have a loan-to-value ratio of only 60 percent, and accounts from 61-90 days old are only 30 percent. Delinquencies in the accounts and the overall creditworthiness of the account debtors may also affect the loan-to-value ratio. Equipment: If the equipment is new, the bank might agree to lend 75 percent of the purchase price; if the equipment is used, then a lesser percentage of the appraised liquidation value might be advanced. However, some lenders apply a reverse approach to discounting of equipment: they assume that new equipment is significantly devalued as soon as it goes out the seller's door (e.g., a new car is worth much less after it's driven off the lot). If the collateral's value is significantly depreciated, loaning 75 percent of the purchase price may be an overvaluation of the equipment. Instead, these lenders would use a higher percentage loanto-value ratio for used goods because a recent appraisal value would give a relatively accurate assessment of the current market value of that property. For example, if a three-year-old vehicle is appraised at $15,000, that's probably very close to its immediate liquidation value. Securities: Marketable stocks and bonds can be used as collateral to obtain up to 75 percent of their market value. Note that the loan proceeds cannot be used to purchase additional stock

4.The credit rating given by the various rating agencies? Credit ratings are opinions about credit risk. Standard & Poors ratings express the agencys opinion about the ability and willingness of an issuer, such as acorporation or state or city government, to meet its financial obligations in full and on time. Credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issue may default. Ratings are provided by credit rating agencies which specialize in evaluating. When it comes to businesses, they see the following: The quality of the assets. Are there new buildings and other assets that are worthy enough that the lender could take as collateral if borrower fails to repay. 1. Quality of the management team. Are they led by smart, visionary people who can run an organization? 2. Quality of the business. Is it profit making? Are the sales growing? Are there are major market risks? 3. Financial Balance Sheet. How much have they already borrowed? Can they service this much debt? What is their existing monthly payment to the loan?

5.Loan documentation ie business & personal financial statements, income tax returns? A personal financial statement (usually lender's own form) and personal federal income tax returns (one to three years) Projected start up cost estimates. Projected balance sheets and income statements for at least two years. Projected cash flow statement for at least the first 12 months Evidence of ownership interests in assets (e.g., leases, contracts) and collateral A business plan that includes a narrative explaining the specific use for the requested funds, how the money will assist the business, and how the borrowed funds will be repaid (repayment sources and duration of repayment period). Any assumptions used in developing your projected financial statements should also be identified. A personal resume, or at least an written explanation of your relevant past business experience, is often submitted with, or in addition to, the business plan. Letters of reference recommending you as a reputable and reliable business person may also help your chances for a loan approval. Some lenders will also want you to submit a breakeven analysis in the form of a financial statement or a graph. A breakeven analysis shows the point at which the company's expenses will match the sales or service volume. The breakeven point can be expressed in terms of dollars or units sold. Income statements and business balance sheets for the past three years Projected balance sheets and income statements for two years Projected cash flow statements for at least the next 12 months Personal and business tax returns for the last three years A business plan (Depending upon the credit history of your business and the purpose for the loan, a business plan for a loan to an existing business may be unnecessary, and a brief narrative of your intentions may suffice.) Other items to include. Depending upon the specific type of loan you are seeking, you should also address certain issues relevant to that loan type. If money is requested for working capital, your documentation should include: the amount that will be used for accounts payable, along with an accounts receivable aging report to disclose the current amounts overdue 30-60 days or older; the amounts that will be used for inventory and any increase in the number of days that inventory on hand will be held; the amount your cash balances will be increased; and a contingency amount that is equal to at least 10 percent but preferably 25 percent. If money is needed for machinery or equipment, include information that addresses: whether the assets will be immediately available or if a delay is anticipated; the price of the assets and how installation will be performed; whether installation will interfere with current production and the cost of any interruptions.

Documentation for an acquisition of land financing should include the real estate's cost, location and size, intended use, and whether any of the land is for future expansion.

6.Conventional lenders will expect a minimum of 4 or 5 trade experiences listed on a business report ,before they consider business credit worthiness. 7. Cycle of cash flows ,the purchase of inventory through the collection of accounts receivable ? The overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale. A business's inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage. Jacksons selling terms were net 30 days customers placing large orders would make an advance payment to help the company finance the production. Work in progress reduction $ 5040000 imminently in June. The remainder of the work in progress inventories would remain stable until the end of the fiscal year 8.Working capital requirements required for day to day activities ? If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller. Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations. From the data which is available from the case the working capital for different months are Working capital for different months are August : 12917

September : 3267

October

: 3754

November : 4156 December January February March April May : 4566 : 5004 : 5396 : 5326 : 5595 : 5817

9.Business market demand ,management competence Business cycles.

The formulas used for calculation of the cash flows are FINANCIAL RATIOS Current Ratio Quick ratio Liabilities) Inventory turnover ratio Receivables turnover ratio Fixed assets turnover ratio Total asset turnover ratio Debt to asset ratio Debt to equity ratio Interest coverage ratio Gross profit margin Net profit margin Return on assets Return on equity Return on equity Working capital = (Current assets/Current liabilities) = ((cash+ Marketable securities + Receivables)/Current = (Net sales/Inventory) = (Net sales/Receivables) = (Net sales/Fixed assets) = (Net sales/Total sales) = (Total debt/Total assets) = (Total debt/Net worth) = (EBIT/Interest) = (Gross profit/Net sales) = (PAT/Sales) = (Net income/Total Assets) = (Net profit/Net worth) = (Net income/Share holders funds) = Current Assets Current liabilities