Mark X Company is the maker of farm and specialty trailers. The company has fallen on difficult times and wants their bank, Wells Fargo, to extend a loan for working capital and an expansion of their current facilities. Mark X feels this will help the company increase sales and therefore improve their financial situation. Wells Fargo is leery of extending any additional funds to Mark X based on their current financial situation and their most recent liquidity and debt ratios. For the background of this case we have used anticipated ratios to complete forecast tables and also some pro forma financial statements. These tools should help us to analyze the position and sensitivity of the company. We also will use several ratios to discuss the standing of the company and how those ratios could vary as some of the relevant input data changes. In this case, we looked at how sensitive the company’s results are in accordance to changes in the sales growth rate, the cost of goods sold percentages and the administrative expenses. To help to show these relationships and sensitivity analysis we will model graphs to see the effect of the changing information along with evaluating several other factors in our decision. We believe the bank should extend the additional short term loan to Mark X. Despite the fact that certain variables do show some sensitivity to each other, most of them appear to be faintly sensitive to changes, we believe that Mark X will still be able to sufficiently pay off the short term loan that they already have through the bank and the loan they are requesting and still maintain sufficient cash reserves. It is also our position that the company will need to be monitored more closely and it would be in their best interest to more efficiently manage their assets and strive to achieve the goals that they have projected.
Mark X is trying to convince Wells Fargo Bank to extend a short term loan of $6,375,000. This loan will be fundamental in Mark X to expand their business which will lead to increasing their sales, net income and stockholders’ wealth. If the bank extends the loan, will Mark X be able to repay the debt based on projected sales increases and projected decreases in their cost of goods sold percentage and administration and selling expenses? How sensitive are the results based on these variable changes? The case also asks us to make a recommendation for the bank to follow and justify our decision. It also encourages us to explain how the bank could leverage themselves to where that are less adverse to the risk of extending the loan and giving examples of how the bank could accomplish that(guarantees, collateral,..).
In 1993, sales were projected to increase by 10%, the cost of goods sold was 82.5% of sales and selling and administration costs were projected to be 8% of sales. This resulted in a net income of $6,099,000. We analyzed the sensitivity of net income, retained earnings, cash and total assets by using a projected sales range between 5% and 15%. We also looked at a range of cost of goods sold percentages between 80% and 85%. Lastly, we evaluated the selling and administration expense with a range from 5.5% to 10.5%. In 1994, sales were projected to increase by 15%, cost of goods sold set at 80% of sales and administration and selling costs to 7.5% of sales. This resulted in a net income of $13,172,000. We again analyzed the sensitivity of net income, retained earnings, cash and total assets by using a projected sales range between 10% and 20%. We used a projected range of cost of goods sold percentages from 77.5 to 82.5% and lastly, we analyzed the selling and administration expense with a range from 5% to 10%.
For each variable that we evaluated we have created data tables to show how the changing percentages would affect the net income of the company which in turn would affect the retained earnings...