Jackson Automative System Harvard Case Solution & Analysis

KEY FACTS:

 

The key facts of this case are quite apparent and clear. Mr. Edward, owner of Jackson automotive systems, decided to purchase the stock of the company from the subversive stockholders. He reached James at the Michigan bank, for a short term loan of $ 5million and planned to use the excess $5 million cash on its balance sheetand the new loan of $5 million to repurchase the firms stock. The date of the loan outstanding is coming close but due to the declining sales in the past few months because of the issues in delivery, he doesn’t contain sufficient money to repay his outstanding. As Jackson is currently facing a cash shortfall, he has received a large order of $4.2 million and to ensure a timely delivery Jackson over purchased the raw material. So not only the delay in shipments have caused Edward delay in payments, but the excess inventory, had cash tied up, making it difficult for Edward to repay its loan.

Jackson Automative System Harvard Case Solution & Analysis

 

PROBLEM STATEMENT:

 

The cash balance at the end of May for the year 2013 is of $4,994,000, following the loan to be repaid on June 31, 2013 of $5 million. The company is currently in an odd situation, as it is out of cash and in need of an additional loan to purchase an equipment, needed long back, which will not only reduce the production cost, but will also improve the production level. Due to several reasons the company was lacking to deliver decent performance, making stockholders combative. So, in order to carry out operations smoothly, Edward decide to repurchase its stocks from the stockholder. The repurchasing of stocks led the firm into a huge cash deficiency, and not only this Edward also borrowed a debt of $5 million from the bank to finance the remaining amount needed for the repurchase of the firm’s stock. At the time of loan repayment, the company got surrounded by unfavorable conditions, making it difficult for the company to pay back the loan.

 

ANALYSIS:

 

By looking at the current scenario of the company, the options available for the company are limited, in order to fulfil one objective the company had to sacrifice another objective.The current forecasted cash flow statement indicates that if the loan of $2.4 million will be approved by the bank and the repayment of loan will be made at the end of September, including the payment of $1.2 million as a dividend, company will be left with a negative cash flow at the end of September. So, it’s a possibility that by looking at a negative cash flow company might hesitate in accepting a loan proposal, proposed by Edward, because as forecasted by the firm by the end of September, firm will be left with no cash to pay back the loan. The following alternative can be considered by the firm in order to fulfill its long term goals................

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