Financial Analysis and Forecasting Mark X Company

assume that the bank is willing to maintain the present credit lines and to

Case: 35 Financial Analysis and Forecasting

grant an additional $6,375,000 of short-term credit on January 1, 1993. In the analysis, take

account of the amounts of inventory and accounts receivable that would be carried if inventory

utilization (based on the cost of goods sold) and days sales outstanding were set at

industry-average levels. Also, assume in your forecast that all of Mark X's plans and predictions

concerning sales and expenses materialize, and that the firm pays no cash dividends

during the forecast period. Finally, in your calculations use the cash and marketable securities

account as the residual balancing figure.

In responding to Questions 5 through 8, no Lotus model modifications are required. Answers

should be based solely on the data contained in the financial statements completed in response to

Question 4.

5. Assume Mark X has determined that its optimal cash balance is 5 percent of sales and that

funds in excess of this amount will be invested in marketable securities, which on average

will earn 7 percent interest. Based on your forecasted financial statements, will Mark X be

able to invest in marketable securities in 1993 and 1994? If so, what is the amount of excess

funds Mark X should invest in marketable securities? Do your financial forecasts reveal any

developing conditions that should be corrected?

6. Based on the forecasts developed earlier, would Mark X be able to retire all of the outstanding

short-term loans by December 31, 1993?

7. If the bank decides to withdraw the entire line of credit and to demand immediate repayment

of the two existing loans, what alternatives would be available to Mark X?

8. Under what circumstances might the validity of comparative ratio analysis be questionable?

Answer this question in general, not just for Mark X, but use Mark X data to illustrate your

points.

9. Now revise your pro forma financial statements for 1993 and 1994 assuming the following

conditions: