The Mark X Company (A)
We must analyze past data and provide expected data for the next two years to assess Mark X Company's financial position. Upon reviewing the data, we will make recommendations for both Mark X Company as well as Karen Dennison of Wells Fargo Bank. Senior management needs compelling evidence that shows the current difficulties faced by the company are not permanent.. It must also be accessed if Mark X can retire all of its outstanding loans by the end of 1993. A sensitivity analysis should also be conducted since the future of this company is very dependent on its performance in 1993 and 1994. Mark X Company is a manufacturer of farm and specialty tailors. Over 85% of sales come from the western part of the United States; however there is a growing market both nationally and internationally. Steve, the president of Mark X, just received word of a deficiency report filed by the bank due to its poor financial position. Important ratios including the current, quick, and debt ratios did not meet limits set by the bank. The Altman Z factor is a measurement of the likelihood of default. Mark X had a factor of 2.97, which is under the minimum of 2.99. Many problems faced by Mark X were caused by the recession in the early 1990's. Farmers were reluctant to buy new equipment since farm commodity prices remained low. In addition, the 1991 luxury tax caused high quality boat/trailer sales to decline. The Tax Reform Act of 1986 also had negative effects. With the reduction in tax benefits for horse breeding, horse transport van sales decreased. So, to stimulate sales, Mark X reduced its prices. Demand stayed down, and inventories continue to increase. The company then decided to change its credit policy to allow even more flexible credit terms. They loans Mark X received from the bank weren’t enough to pay for the asset expansion, so the company delayed its payments. The company decided to sign a contract for a plant expansion that would need an additional $6,375,000 during the first quarter of 1993 which will require the company to take out a short term loan from the bank.
Mark X forecasts a 10% increase in sales from 1992-1993 and another 15% increase the following year. The policy of aggressive pricing and easy credit would also be reversed. With these changes, Mark X should decrease its cost of goods sold from over 85% of sales in 1992 to about 82.5% of sales in 1993 and to 80% in 1994. It also felt it could reduce its administrative/selling expense to 7.5% by 1994. Cost reductions will also be made in miscellaneous expenses, which should amount to only 1.25% in 1994. Future bills would also be paid more promptly and cash dividends would be temporarily eliminated.
Assumption is that interest levels won't drastically change over the next two years. The bank however will charge 12% on the existing and additional short-term loan in granted. The assumed 40% combined state and federal tax rate will remain the same. If Steve, the president can turn the company around, the P/E ratio in 1993 should be 10 and in 1994 should be 12. For a complete look at Mark X’s Pro Forma Balance Sheets, Income Statement and Ratio Analysis, please refer to Tables 1-3 in the back. Overall, Mark X Company is in very poor financial positions. This can be attributed to the economic depression. The company also changed its credit policy which caused accounts receivables to increase dramatically. However, in doing so, the company lowered the quality of its credit policy, which resulted in a poor DSO ratio. The following financials further illustrate just how weak the financial position is. Gross profit is down to 14.76% in 1992. Although sales are increasing, profits are decreasing at a greater rate. Operating expenses which include administrative, selling, depreciation and miscellaneous expenses are a combined 12.59% of sales in 1992. The greater this number, the less profitable the company is. These expenses seem to be...
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