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?

TABLE 1 Historical and Pro Forma Balance Sheets for Years Ended December 31(in Thousands of Dollars) Proforma 1990 1991 1992 1993 1994 Assets: Cash and marketablesecurities $ 5,149 $ 4,004 $ 3,906 X X Accounts receivable 17,098 18,462 29,357 X X Inventory 18,934 33,029 46,659 X X Current assets $41,181 $55,495 $79,922 X X Land, buildings, plant, and equipment $17,761 $20,100 $22,874 $29,249 30,126 Accumulated depreciation (2,996) (4,654) (6,694) (9,117) (10,940) Net fixed assets $14,765 $15,446 $16,180 $20,132 $19,186 Total assets $55,946 $70,941 $96,102 X X Liabilities and Equity: Short-term bank loans $3,188 $ 5,100 $18,233 X X Accounts payable 6,764 10,506 19,998 15,995 16,795 Accruals 3,443 5,100 7,331 9,301 11,626 Current liabilities $13,395 $20,706 $45,562 X X Long-term bank loans $ 6,375 $ 9,563 $ 9,563 $ 9,563 $ 9,563 Mortgage 2,869 2,601 2,340 2,104 1,894 Long-term debt $ 9,244 $12,164 $11,903 $11,667 $11,457 Total liabilities $22,639 $32,870 $57,465 X X Common stock $23,269 $23,269 $23,269 $23,269 $23,269 Retained earnings 10,038 14,802 15,368 X X Total equity $33,307 $38,071 $38,637 X X Total liabilities and equity $55,946 $70,941 $96,102 X X Notes: a. 3,500,000 shares of common stock were outstanding throughout the period 1990 through 1992. b. Market price of shares: 1990$17.78; 1991$9.71; 1992$3.67. c. Price/earnings (P/E) ratios: 19906.61; 19915.35; 199217.0. The 1992 P/E ratio is high because of the depressed earnings that year. d. Assume that all changes in interest-bearing loans and gross fixed assets occur at the start of the relevant years. e. The mortgage loan is secured by a first-mortgage bond on land and buildings.

Case: 35 Financial Analysis and Forecasting TABLE 2 Historical and Pro Forma Income Statements for Years Ended December 31 (Thousands of Dollars) Pro Forma 1990 1991 1992 1993 1994 Net sales $170,998 $184,658 $195,732 X X Cost of goods sold 187,684 151,761 166,837 X X Gross profit $ 33,314 $ 32,897 $ 28,895 $37,678 $49,520 Administration and selling expenses $ 12,790 $ 15,345 $ 16,881 $17,224 X Depreciation 1,594 1,658 2,040 2,423 1,823 Miscellaneous expenses 2,027 3,557 5,725 3,768 X Total operating expenses $ 16,411 $ 20,560 $ 24,646 X X EBIT $ 16,903 $ 12,337 $ 4,249 $14,263 X Interest on short-term loans $ 319 $ 561 $ 1,823 $ 2,953 $ 2,953 Interest on long-term loans 638 956 956 X 956 Interest on mortgage 258 234 211 X 170 Total interest $ 1,215 $ 1,751 $ 2,990 $ 4,098 $ 4,079 Before-tax earnings $ 15,688 $ 10,586 $ 1,259 X $21,953 Taxes 6,275 4,234 504 4,066 8,781 Net income $ 9,413 $ 6,352 $ 755 X X Dividends on stock 2,353 1,588 89 $ 0 X Additions to retained earnings $ 7,060 $ 4,764 $ 567 X X

Notes: a. Earnings per share (EPS): 1990$2.69; 1991$1.81; 1992$0.22. b. Interest rates on borrowed funds: Short-term loan: 199010%; 199111%; 199210%. Long-term loan: 10% for each year. Mortgage: 9% for each year. c. For purposes of this case, assume that expenses other than depreciation and interest are totally variable with sales. Case: 35 Financial Analysis and Forecasting

TABLE 3 Common Size Balance Sheets for Years Ended December 31 1990 1991 1992 Assets: Cash and marketable securities 9.20% 5.64% 4.06% Accounts receivable 30.56 26.02 X Inventory 33.84 46.56 48.55% Current assets 73.61% 78.23% X Land, buildings, plant, and equipment 31.75% 28.33% X Accumulated depreciation (5.36) (6.56) (6.97) Net fixed assets 26.39% 21.77% 16.84% Total assets 100.00% 100.00% 100.00% Liabilities and Equities: Short-term bank loans 5.70% 7.19% 18.97% Accounts payable 12.09 14.81 20.81 Accruals 6.15 7.19 7.63 Current liabilities 23.94% 29.19% 47.41% Long-term bank loans 11.39% 13.48% X Mortgage 5.13 3.67 2.43 Long-term debt 16.52% 17.15% X Total liabilities 40.47% 46.33% 59.80% Common stock 41.59% 32.80% 24.21% Retained earnings 17.94 20.86 X Total equity 59.53% 53.67% X Total liabilities and equity 100.00% 100.00% 100.00% Note: Rounding differences occur in this table. Case: 35 Financial Analysis and Forecasting