Jackson automotive systems Harvard Case Solution & Analysis

REASONS OF NON REPAYMENT OF LOAN:

Natural Disasters: The natural disasters are one of the most shocking and sudden death event for many of the companies including both small, medium size and large size companies also. These are those events that can occur at any time without any prior notice or warnings. These hazardous events can bring the company to road of darkness in the blink of an eye, which causes disruption in their operations and damages many assets of their company. This leads to the cash problems, negative earnings and in the worst case the companies become unstable and got severe damages due to which they can also not been able to pay their debts consequences of these events leads to bankruptcy also.

Economic Disasters:These are disastrous and fierce events that move many conglomerates towards their dark side. These economic downturns are a nightmare for the companies like Jackson and many others. These events create an imbalance between the whole world economies. Events like the financial crisis in 2008, where this financial crisis has negatively affected almost each and every company towards its windup. During this event the sales of the companies decline and the cost of doing business becomes difficult to bear. This leads to the companies restricting the capacity to produce in order to limit their losses. Finding unskilled and low wage labors to cut their cost causing redundancy in the employment ultimately increases the unemployment rate. Decreasing in sales and capacity will reduce the profitability and also the put a huge crack on the cash flows of the company like Jackson. Continued reduction in employment, sales, capacity while increasing the cost will cause cash flow problems as well this will hinder the company to successfully pay its debts and move it towards its bankruptcy.

Inexperience of having debts: The companies like Jackson, who are financed through equity which is considered to be riskier and the most costly source of finance around the world,want to introduce debts in their company to attain further growth, then sometimes they may be unable to identify the impact and the changes required to get the implementation of debts successfully.

This inexperience of having debts requires effort to identify debt’s impact upon their financial position because the historical experience lacks the ability to pay interest and its consequences upon their financial position. Therefore, it is better to hire a consultant or an expert who can unearth all the hidden impacts of the first time introduction of the debts and helps the company like Jackson to smoothen their operations.

Internal Policy failures: There are several factors that describe the inappropriateness of the policies of Jackson that it has taken in order to manage its cash flows smoothly.

The first one is the receivable turnover limit that is equal or greater than its payable turnover limit. Not holding the cash or by quickly paying off their liabilities, which is a good thing.However,this limits hould be greater than the receivable limit which gives an advantage of having cash for some time to manage their working capital position.

Moreover, it should use short term investments and cash to finance the acquisition of the fixed assets. This is an aggressive policy which also creates major issue of cash shortages leading to the failure to pay its debts.

The repurchase of stock through the use of cash and debts is also not a smart move,as it is already being experienced that many big companies tried this LBO technique and were forced into bankruptcy. This LBO put the focus of the company more on debts, even though it is cheaper than the equity, how ever a substantial increase in it will create many problems due to the increase payments of interest that have less impact on the profitability.Nevertheless, there will be a huge impact upon the cash flows due to principal repayments and also share repurchases.

MAJOR DEVELOPMENTS CONTRIBUTE TO THE ABOVE SITUATIONS:

On September 2012, Edward, the current owner of Jackson Automotive, decided to repurchase the stock from those shareholders who were opposing the official policies. The repurchase of stock contains 40% of stake, which is a huge percentage, requires substantial cash

Jackson Automotive Case Study Solution

The repurchase of stock will be from the use of cash and short term debt financing also which increases their leverage ratio too high and reducing their cash to even further which has become a problem for the Jackson Automotive in paying their interest payments as well as the principal repayments of these debts upon maturity.....................

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