Which target (company) would you recommend and why based on the facts below? Sec

ID: 2615740 • Letter: W

Question

Which target (company) would you recommend and why based on the facts below?

Section I - Financials & Metrics as of 12/31/XX In $000's

Target A Target B

Sales $535,500 $698,000

COS $485,700 $489,000

Margin $49,800 $209,000

SG&A $30,000 $15,000

EBIT $19,800 $194,000

Weighted average cost of capital 10% 10%

NPV-Discounted cash flows $225,000 434,000

Payback period 10 years 8 years

Collection days 45 days 30 days

Inventory Turnover 12 4

Working capital turnover 8.5 5

Cash $50,000 $150,000

Accounts receivable, net $100,000 $120,000

Debt $10,000 $100,000

Equity $100,000 $50,000

Section II Due diligence findings

Financial control environment Excellent Poor

Pending legal issues (likelihood>50%) Properly accrued Under accrued

Environmental issues Properly accrued Lack of documentation

HR involvement and responsiveness Poor Average

Operational environment Poor Excellent

Business practices and ethics Poor Average

Answer )

recommendation will favour target B ,due to following facts

Negative points of B

Low in EBIT and Poor Financial control environment

Operational environment: Excellent

Business practices and ethics : Average

Number of shares are less in comparision

Higher is sales

Higher is margin

Higher is cash ( can take up new invesment opportunity in future)

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.