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Decision Case 13-5: Acquisition Decision Diversified Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly
Decision Case 13-5: Acquisition Decision | ||||||
Diversified 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. Diversified does not limit itself to companies in any one industry, but looks for firms with a sound financial base and the ability to stand on their own financially. | ||||||
The president of Diversified recently told a meeting of the companys officers: I want to impress two points on all of you. First, we are not in the business of looking for bargains. Diversified has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family. We dont want companies that may appear to be a bargain on paper but cant survive in the long run. Second, a new member of our family must be able to come in and make it on its ownthe parent is not organized to be a funding agency for struggling subsidiaries. | ||||||
Ron Dixon is the vice president of acquisitions for Diversified, a position he has held for five 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 financials for a manufacturer, Heavy Duty Tractors Inc. Dixon believes that Heavy Duty is a cant-miss opportunity for Diversified and asks you to confirm his hunch by performing basic financial statement analysis on the company. The most recent comparative balance sheets and income statement for the company follow. | ||||||
Heavy Duty Tractors Inc. | Heavy Duty Tractors Inc. | |||||
Comparative Statements of Financial Position | Statement of Income and Retained Earnings | |||||
(thousands omitted) | For the Year Ended December 31, 2017 | |||||
31-Dec-17 | 31-Dec-16 | (thousands omitted) | ||||
Assets | Sales revenue | 875,250 | ||||
Current assets: | Cost of goods sold | 542,750 | ||||
Cash | 48,500 | 24,980 | Gross profit | 332,500 | ||
Marketable securities | 3,750 | - | Selling, general, and administrative expenses | 255,360 | ||
Accounts receivable, net of allowances | 128,420 | 84,120 | Operating income | 77,140 | ||
Inventories | 135,850 | 96,780 | Interest expense | 45,000 | ||
Prepaid items | 7,600 | 9,300 | Net income before taxes | 32,140 | ||
Total current assets | 324,120 | 215,180 | Income tax expense | 9,250 | ||
Long-term investments | 55,890 | 55,890 | Net income | 22,890 | ||
Property, plant, and equipment: | Retained earnings, January 1, 2017 | 169,820 | ||||
Land | 45,000 | 45,000 | 192,710 | |||
Buildings and equipment, less accumulated depreciation of $385,000 in 2017 and $325,000 in 2016 | 545,000 | 605,000 | Dividends paid on common stock | 10,000 | ||
Total property, plant, and equipment | 590,000 | 650,000 | Retained earnings, December 31, 2017 | 182,710 | ||
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 2024 | 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 | ||||
Required | ||||||
4 | What will you tell your boss? Should he recommend to the board of directors that Diversified put in a bid for Heavy Duty Tractors? |
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