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

Answer 1

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