Question

Case Study: John & Jon (J&J) Financial Statement Preparation & Analysis

You are recently hired as a senior financial analyst for John & Jon (J&J) and you are in charge of preparing the financial statements and presenting an annual analysis on the board meeting.

Overview of John & Jon’s Balance Sheet

The assets of John & Jon (J&J) in 2017 has both current assets and net plant and equipment. It has total assets of $ 7.5 million and net plan and equipment equals $5 million. J&J only finances with $2.5 million long-term debt, $500,000 notes payable and total common equity of $3.5 million. The firm does have $400,000 accounts payable and $600,000 accruals on its balance sheet. Now assume the firm’s current assets consist entirely of cash and cash equivalence, account receivables and inventories. If it has 1.5 million cash and cash equivalents and $400,000 account receivables.

John & Jon’s Income Statement in 2017 (dollars are in millions)

Sales     $15

Operating costs excluding depreciation and amortization              $5

EBITDA $10

Depreciation & Amortization      $0.6

EBIT      $9.4

Interest $0.4

EBT       $9

Taxes (40%)      $3.6

Net Income $5.4

Cash Dividends $2.0

19. What is the ratio of total debt to total capital? (1%)

20. What is the ratio of return on common equity? (1%)

21. Assume between 2016 and 2017, net operating working capital has increased by $500,000, calculate John & Jon’s free cash flow. (Hint: use this formula. FCF = [EBIT (1-T) +Depreciation & Amortization] – [Capital Expenditures + Change on Net Operating Working Capital]) (5%)

22. Now after you present your analysis on the meeting, the CEO would like to see higher sales and a forecasted net income of $10.8 million. Assume that operating costs (excluding depreciation and amortization) are still one-third of sales and that depreciation and amortization and interest expenses will increase by 10%. The tax rate which is 40%, will remain the same. What level of sales would generate $10.8 million in net income? (5%)

Answer 1

liabilities	$ in million
equity	3.5
long term debt	2.5		19. total debt to capital ratio =	(2.5/(3.5+2.5))
notes payable	0.5		(debt / debt + 'equity')	0.4166666667
acount payable	0.4
accruals	0.6		20. return on equity	1.5428571429
TOTAL	7.5		(net income/ shareholders equity)
Assets
Plant & equipment	5		21. FCF=
Cash & cash eq	1.5		FCF = [EBIT (1-T) +Depreciation & Amortization] – [Capital Expenditures + Change on Net Operating Working Capital])
account receivable	0.4		(debt / debt + 'equity')
inventories	0.6		(((9.4*(1-0.4))+0.6-((0.5))))
TOTAL	7.5		5.74
particulars	$ in million	$ in million
Sales	15	28.65	< Answer 22.
operating cost (1/3 ON SALES)	5	9.55	1/3rd
EBITDA	10	19.1	2/3rd
DA	0.6	0.66	110.00%
EBIT	9.4	18.44
Interest	0.4	0.44	110.00%
EBT	9	18	(10.8/0.6)
Taxes @40%	3.6	7.2
net income	5.4	10.8	60.00%
dividend	2