Why cant a profitable company like Jackson repay its loan on time?


· Prepare cash budgets and pro forma financial statements to consolidate understanding of the fundamentals of financial forecasting and the relationship between the two basic forecasting techniques – cash budgeting and pro forma financial statement analysis

· Assess whether the lender should issue the loan to a profitable firm that experiences a bottleneck problem in its production

· Practice critical evaluation of assumptions underlying financial forecasts

· Provide a preliminary analysis on topics like share repurchases and dividend payouts


1. Why can’t a 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.

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

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

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?

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 from expectations.

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?

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?

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?


Jackson is a profitable company that has been in business for over 30 years. The company manufactures and sells a variety of products to wholesalers, retailers, and the general public. Jackson’s primary market is the Midwest region of the United States. In August 2012, Jackson had sales of $1 million with an operating income of $100,000. In May 2013, Jackson had sales of $2 million with an operating income of $200,000.

Jackson has grown substantially since August 2012 due to new product lines being introduced into their line-up as well as increased advertising expenditures. During this time frame there have also been major changes within the organization such as: hiring additional staff members and increasing their salaries; purchasing new equipment; expanding into new markets; etc.. This growth has resulted in an increase in accounts receivable which are now at almost 60% of sales compared to 40% in August 2012 (see page 3). Accounts payable have also increased from 50% to 60% during this time frame (see page 4). The reason for this increase is due to the fact that Jackson was not able to pay off its loan on time which was due on September 1st but was…



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