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

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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?
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SOLUTION
In order to decide which target company to acquire, the purchaser should do business
valuations of the target companies. This helps in better decision regarding acquisition of
Target...

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