Evaluation of potential acquisition: BEB is considering the acquisition of Martin & Sons, which has $$5\mathrm{.}3$ million in net working capital. They also have total assets with a book value of $$58\mathrm{.}6$ million and a market value of $$63\mathrm{.}4$ million. They currently carry no debt on their balance sheet, sales are expected to be $$52$ million next year, and their tax rate is like BBE at $36\%.$ Through a mixture of synergistic savings and increased market share, this acquisition should add $$2\mathrm{.}3$ million in net profit per year for the next $10$ years. BEB is considering buying the company for $$60$ million in cash. The acquisition will be recorded using the purchase accounting method.

How do you recommend the firm finance this transaction?

Is there a danger that BEB could damage their finances to the point that bankruptcy is a potential?

Concept Check:

$5-$factor model of the Altman Z$-$score $($a for private manufacturing firms$)$:

Z$-$score $=0\mathrm{.}717$T $1+0\mathrm{.}847$T $2+3\mathrm{.}107$T $3+0\mathrm{.}42$T $4+0\mathrm{.}998$T $5$

where,

T $1=$ Working Capital $/$ Total Assets T $2=$ Retained Earnings $/$ Total Assets T $3=$ Earnings Before

Interest and Taxes $/$ Total Assets T $4=$ Equity $/$ Total Liabilities T$5=$ Sales $/$ Total Assets

Zones of Discrimination:

$23$ or less $$Distress$$ Zone

$$ from $1\mathrm{.}23$ to $2\mathrm{.}9$Grey$$ Zone

$9$ or more $$Safe$$ Zone