Evaluation of potential acquisition: XYZ is considering the acquisition of Martin & Sons, which has $5.3 million in net working capital. They also have total assets with a book value of $58.6 million and a market value of $63.4 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 XYZ at 36%. Through a mixture of synergistic savings and increased market share, this acquisition should add $2.3 million in net profit per year for the next 10 years. XYZ 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 BBE 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 = 0.717T1 + 0.847T2+ 3.107T3 + 0.42T4+0.998T5 where, T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Equity / Total Liabilities T5 = Sales / Total Assets Zones of Discrimination: 23 or less "Distress Zone from 1.23 to 2.9- "Grey" Zone 9 or more - "Safe" Zone Interpretation of Altman Z-Score The Z-Scores help predicts corporate defaults as well as an easy-to-calculate measure of control for the financial distress status of companies in academic studies. A Z-Score above 2.6 (2.9) indicates a company to be healthy. Besides, such a company is also not likely to enter bankruptcy. However, Z- Scores ranging from 1.1-2.6 (1.23-2.9) are taken to lie in the grey area. . Evaluation of potential acquisition: XYZ is considering the acquisition of Martin & Sons, which has $5.3 million in net working capital. They also have total assets with a book value of $58.6 million and a market value of $63.4 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 XYZ at 36%. Through a mixture of synergistic savings and increased market share, this acquisition should add $2.3 million in net profit per year for the next 10 years. XYZ 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 BBE 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 = 0.717T1 + 0.847T2+ 3.107T3 + 0.42T4+0.998T5 where, T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Equity / Total Liabilities T5 = Sales / Total Assets Zones of Discrimination: 23 or less "Distress Zone from 1.23 to 2.9- "Grey" Zone 9 or more - "Safe" Zone Interpretation of Altman Z-Score The Z-Scores help predicts corporate defaults as well as an easy-to-calculate measure of control for the financial distress status of companies in academic studies. A Z-Score above 2.6 (2.9) indicates a company to be healthy. Besides, such a company is also not likely to enter bankruptcy. However, Z- Scores ranging from 1.1-2.6 (1.23-2.9) are taken to lie in the grey area
