Which target (company) would you recommend and why based on the facts below (Ple
ID: 2615820 • Letter: W
Question
Which target (company) would you recommend and why based on the facts below (Please explain thoroughly in detail?)
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
Explanation / Answer
Section I :- Here we see that the Target A has low sales as compared to sales of Target B and also we see that
The even both the targets has positive NPV but the NPV of Target B is more than the NPV of Target A
And now after that EBIT from Target A is also very large as compared to the EBIT of Target A i.e 19800 from Target A and 194000 from Target B
And now compared as per Payback period the payback period from Target B is also less as compared to target B means the amount invested in target B is recovered back as earlier from The amount invested in the project of Target A
The cash and the debtors are also more of Target B from the Target A means there is a proper and high liquidity in Target A
And now in Section II
We see that the view as per due diligence findings The financial environment of the target A is excellent and of target B is poor so beneficial to invest in Target A
Operational environment and the business ethics is better of Target B as compared to target a
So I should give the suggestion to invest in Target B as compared to Target A as now the financial environment of target B is not good but as the given data in the above section it shows that it may early become good
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