Individual Assignment - Essay Example

The company chose to deal with water, a vital commodity over which, because of public interest, they could not raise prices too high without becoming the target of negative sentiments. This means that MIBW4A will be trapped perpetually in narrow profit margins. Underreporting is a real concern, because there is no way for MIBW4A to oversee sales. The revenue sharing agreement, where water vendors receive 20% and MIBW4A 80%, in unrealistic, given that the water which comprises the product is provided by water vendors, the cost they shoulder.

MIBW4A will be more justified to charge a flat rate for rental. There is no reason why the vendors could not purchase their own filters and get 100% of their own sales, instead of turning over 80% to MIBW4A. Slow Sand Filtration is inferior to the 10-stage, or other multistage, standard water filtration system. There are more strategic, technological, and operational weaknesses in the business plans for MIBW4A, that there is greater reason to believe that it shall be more unfeasible than feasible. 2. What conclusions can you draw from your analysis of the financial statements?

The financial statements are not realistic projections of the likely financial performance of the proposed business. On the following pages, the ratios of the pro forma financial statements, and the horizontal and vertical analysis of the balance sheet and income statement, are presented. Since the company shall not rely on short-term or long-term borrowings or liabilities, there are no liquidity or solvency ratios to speak of. All financing will be by equity (Atril & McLaney, 2008). This in itself is financially unsound, because the business does not explore the profit magnifying power of financial leverage.

Fixed asset and total asset turnovers appear rosy, but this not being a manufacturing concern, reliance on these ratios is not significant. The firm has no major fixed assets directly related to its production except the filters, its contract, and its vehicles. Of these, only the vehicles are of real, tangible value, because the filters and contract are only as valuable as their perceived usefulness allows. Obsolescence and lack of market interest could drive the value of these assets to almost nothing very quickly.

There being no cost of goods sold, there is no gross profit margin. The net profit margin is high at 59% and 61%, while the ROI (which is also the ROE since equity financed all the assets) is high for the second year at 96% but drops by 30 percentage points to 60% for the third year. Again, these ratios could not be relied upon because there appear to be significant elements which were not considered in the forecasting of revenues and costs. (Sources: Paramasivan, et al., 2008; Shim, et al., 2008) The common-size balance sheet (vertical analysis) on the next page shows each account as a ratio of total assets.

A huge proportion of the assets are in cash, indicating that the company is under-invested. Keeping huge amounts of cash is unproductive; where these funds are not needed to be invested in the company’s business, it should be put in marketable securities such as safe government bonds or treasury bills. The horizontal analysis points to the