Jackson Automotive Essay

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BACKGROUND Jackson Automotive Systems is an Original Equipment Manufacturer located in Jackson, Michigan. Larry Edwards is the president of the company. It is operating in automotive parts industry with product lines in advanced heating and air conditioning systems, engine cooling systems and parts and fuel injection and transfer systems. The company experienced fast growth, was stable during the global recession period and has steady rebuilding of sales since 2010 with substantial backlog of orders. In September 2012, Edwards decided to repurchase stocks from a group of dissident shareholders. He planned to use $5 million short-term loan and $5 million in excess cash on its balance sheet to facilitate for this buyback, which would…show more content…
Shipment delays due to material shortages caused shortfall in April-May actual sales. Given the issues above, Jackson really needs additional loan to operate the business without further delay in their order fulfillment. However, the challenge of the company is whether it is able to pay off the loan by September 2013 as Edwards proposed to the bank.
Jackson Automotive has two major events occurred between August 2012 and May 2013. These two events put the company into a challenging financial situation, which caused the company unable to repay its loan on time. The first one is the repurchase of stock at 10,000, in which half of them was funded by short-term loan ($5 million) and the cash on hand. By using cash (source of fund) to fund for this repurchase, Jackson Automotive has used 60% of the source of fund available for the company. In addition, borrowing the bank loan has increased the debt ratio from 23% in August to 42% in September (see exhibit 1). This repurchase decision also affects the debt to equity ratio, which went from 0.3 in August to 0.73 in September. This means that the company has less financial stable than before, and more risky to the creditors and investors. These negative effects could lead to the less solvency ability of the company. Besides that, the company also purchased significant inventory in April and May, used about 30% source of fund, which led to the dramatic increase inventory to sales ratio from 1.1 to 3.2 (see

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