Massachusetts Stove Company

Course ID: 25

Finance 400

Spring 2015

Executive Summary

Gen. Samantha C. O’Neill, CEO and CFO:

Massachusetts Stove Company

It is January 15, Year 8 (= t7 = t0). I was asked to decide today whether or not your Company will enter the market for gas stoves and explain why. I was asked to base this decision off of my evaluation of the change in Expected Value of Equity, which the entrance into the gas-stove market will bring about. If the change in value of equity were positive, I would prefer to enter the gas-stove market. If the change in value of equity were negative, I would prefer not to enter the gas-stove market. Recommend for or against this new product and course of action on the basis of the change in the expected value of equity. My father is fishing with Tel’c and my Mom is off-Planet preventing a supernova, so I am forced to do all the analysis myself. I need to decide whether or not to produce and sell gas stoves based on my evaluation of the change in Expected Value of Equity which entrance into the gas-stove market will bring about. If the change in value of equity were positive, I would prefer to enter the gas-stove market. If the change in value of equity were negative, I would prefer not to enter the gas-stove market. Recommend for or against this new product and course of action on the basis of the change in the expected value of equity.

I have completed the requested analysis of Massachusetts Stove Company and am now able to decide whether or not it would be more profitable to enter the gas-stove market. I personally recommend that we should not move into the gas stove market because it does not seem to produce enough profit in order to make this market worth entering. In the following pages I will explain my major concerns and why I believe we will not receive enough from sales of gas stoves.

To start off, the best-case scenario results in financial ratios similar to those of Massachusetts Stove Company in recent years. The profit margin declines slightly in years 7 and 9 as the firm incurs costs to up its new product line. However, it steadily increases from years 10 - 12 as a result of economies of scale with respect to selling expenses. The asset turnover increases, primarily as a result of an increasing fixed-asset turnover. The sales increases are sufficient enough to provide economies of scale benefits for fixed capacity costs. The company can decrease its financial leverage continually as it repays its bank borrowing without adding additional borrowing to finance capital expenditures or product development. Finally, the short-term liquidity and long-term solvency ratios would be strong throughout the five years.