Background

You are the Director of Accounting & Controls for Company XYZ and your boss the VP/Controller has asked you to review a pending

transaction that has two potential targets. Your company is trying to decide which target is a better fit both financially and culturally.

Below, you will find the facts of the case and the question that needs to be addressed.

Facts

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

Weight Average Cost of Capital 10% 10%

Net Present Value - Discounted Cash Flow $ 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 & Responsiveness Poor Average

Operational Environment Poor Excellent

Business Practices & Ethics Poor Average

Question for Discussion

Which target would you recommend and why?