Question

In: Finance

Mattel Toy Manufacturing has an outstanding $11 million loan with Wells Fargo Bank for the current...

Mattel Toy Manufacturing has an outstanding $11 million loan with Wells Fargo Bank for the current year. As required in the loan agreement, Mattel reports selected data items to the bank each month. Based on the following information, is there any indication of a developing problem loan? About what dimensions of the firm’s performance should Wells Fargo Bank be concerned?

One

Two

Three

Four

     Current

Month

Months

Months

Months

      Month

Ago

Ago

Ago

Ago

Cash account (millions of dollars)

$33

$57

$51

$44

$43

Projected sales (millions of dollars)

$298

$295

$294

$291

$288

Stock price per share

(monthly average)

$6.60

$6.50

$6.40

$6.25

$6.50

Capital structure (equity/debt ratio

in percent)

32.8%

33.9%

34.6%

34.9%

35.7%

Liquidity ratio (current assets/

current liabilities)

1.10x

1.23x

1.35x

1.39x

1.25x

Earnings before interest and taxes

(EBIT; in millions of dollars)

$15

$14

$13

$11

$13

Return on assets (ROA; percent)

3.32%

3.25%

2.98%

3.13%

3.11%

Sales revenue (millions of dollars)

$290

$289

$290

$289

$287

Solutions

Expert Solution

Answer: While analyzing the firm's performance with the help of Ratios, we get these points:

  1. Company has significant amount of cash with it that is needed for day to day operations and it is good to maintain the liquidity in the business.
  2. Company's share price is stable and not moving much from last few months.
  3. Company has enough equity in its capital structure.
  4. Company's current ratio is above 1 that shows company is liquid and has enough current assets to meet the short term obligations.
  5. Company's EBIT is good and has increased from past three months.
  6. Company's ROA is lower but positive, company is able to generate some return on assets.
  7. Company's sales revenue is good and it is meeting the projections because it is very close to the expected sales.

Conclusion- Company has good liquidity position, it has enough cash and its financial health is sound. Company is able to repay the loan. Wells Fargo should be concerned about firm's Asset quality because it is generating lower return. Company's investment in assets is only fruitful when assets are able to generate good returns. Wells Fargo should also focus on the firm's EBIT.


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