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.
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 $19,800$ 4194,000$
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
Which target would you recommend and why?
Please explain thoroughly.