Acquisition Decision Diversifi ed Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly over the last ten years through buyouts of medium-size companies. Diversifi ed does not limit itself to companies in any one industry, but looks for fi rms with a sound fi nancial base and the ability to stand on their own fi nancially.

The president of Diversifi ed recently told a meeting of the company’s offi cers: “I want to impress two points on all of you. First, we are not in the business of looking for bargains. Diversifi ed has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family. We don’t want companies that may appear to be a bargain on paper but can’t survive in the long run. Second, a new member of our family must be able to come in and make it on its own—the parent is not organized to be a funding agency for struggling subsidiaries.”

Ron Dixon is the vice president of acquisitions for Diversifi ed, a position he has held for fi ve years. He is responsible for making recommendations to the board of directors on potential acquisitions. Because you are one of his assistants, he recently brought you a set of fi nancials for a manufacturer, Heavy Duty Tractors Inc. Dixon believes that Heavy Duty is a “can’t-miss” opportunity for Diversifi ed and asks you to confi rm his hunch by performing basic fi nancial statement analysis on the company. The most recent comparative balance sheets and income statement for the company follow.
Heavy Duty Tractors Inc.
Comparative Statements of Financial Position (thousands omitted)
December 31, 2010 December 31, 2009 Assets Current assets:
Cash $ 48,500 $ 24,980 Marketable securities 3,750 0 Accounts receivable, net of allowances 128,420 84,120 Inventories 135,850 96,780 Prepaid items 7,600 9,300 Total current assets $ 324,120 $ 215,180 Long-term investments $ 55,890 $ 55,890 Property, plant, and equipment:
Land $ 45,000 $ 45,000 Buildings and equipment, less accumulated depreciation of $385,000 in 2010 and $325,000 in 2009 545,000 605,000 Total property, plant, and equipment $ 590,000 $650,000 Total assets $ 970,010 $ 921,070 Liabilities and Stockholders’ Equity Current liabilities:
Short-term notes $ 80,000 $ 60,000 Accounts payable 65,350 48,760 Salaries and wages payable 14,360 13,840 Income taxes payable 2,590 3,650 Total current liabilities $ 162,300 $ 126,250 Long-term bonds payable, due 2017 $ 275,000 $275,000 Stockholders’ equity:
Common stock, no par $ 350,000 $350,000 Retained earnings 182,710 169,820 Total stockholders’ equity $ 532,710 $ 519,820 Total liabilities and stockholders’ equity $ 970,010 $ 921,070 Heavy Duty Tractors Inc.
Statement of Income and Retained Earnings For the Year Ended December 31, 2010 (thousands omitted)
Sales revenue $ 875,250 Cost of goods sold 542,750 Gross profi t $ 332,500 Selling, general, and administrative expenses 264,360 Operating income $ 68,140 Interest expense 45,000 Net income before taxes and extraordinary items $ 23,140 Income tax expense 9,250.

Income before extraordinary items $ 13,890 Extraordinary gain, less taxes of $6,000 9,000 Net income $ 22,890 Retained earnings, January 1, 2010 169,820 $ 192,710 Dividends paid on common stock 10,000 Retained earnings, December 31, 2010 $ 182,710 Required 1. How liquid is Heavy Duty Tractors? Support your answer with any ratios that you believe are necessary to justify your conclusion. Also indicate any other information that you would want to have in making a fi nal determination on its liquidity.
2. In light of the president’s comments, should you be concerned about the solvency of Heavy Duty Tractors? Support your answer with the necessary ratios. How does the maturity date of the outstanding debt affect your answer?
3. Has Heavy Duty demonstrated the ability to be a profi table member of the Diversifi ed family? Support your answer with the necessary ratios.
4. What will you tell your boss? Should he recommend to the board of directors that Diversifi ed put in a bid for Heavy Duty Tractors?AppendixLO1