Finance Case 35 Company X Financial Analysis

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Date Submitted: 01/21/2011 08:54 PM

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Mark X Company manufactures farm and specialty trailers of all types. More than 85 percent of

the company�s sales come from the western part of the United States, particularly California,

although a growing market for custom horse transport vans designed and produced by Mark X is

developing nationally and even internationally. Also, several major boat companies in California and

Washington have had Mark X design and manufacture trailers for their new models, and these

boat-trailer �packages� are sold through the boat companies� nationwide dealer networks.

Steve Wing, the president of Mark X, recently received a call from Karen Dennison, senior

vice president of Wells Fargo Bank. Karen told Steve that a deficiency report generated by the

bank�s computerized analysis system had been filed because of Mark X�s deteriorating financial

position. The bank requires quarterly financial statements from each of its major loan customers.

Information from such statements is fed into the computer, which then calculates key ratios for

each customer and charts trends in these ratios. The system also compares the statistics for each company

with the average ratios of other firms in the same industry and against any protective covenants

in the loan agreements. If any ratio is significantly worse than the industry average, reflects a marked

adverse trend, or fails to meet contractual requirements, the computer highlights the deficiency.

The latest deficiency report on Mark X revealed a number of significant adverse trends and

several potentially serious problems (see Tables 1 through 6 for Mark X�s historical financial statements).

Particularly disturbing were the 1992 current, quick, and debt ratios, all of which failed to

meet the contractual limits of 2.0, 1.0, and 55 percent, respectively. Technically, the bank had a legal

right to call all the loans it had extended to Mark X for...