A large chemical company is considering acquiring two small companies.
The following is the financial data about two companies:(Rs in lakh)
Company 1 Company 2
Sales 108.65 108.65
Less: Variable cost 43.46 35.85
Contribution 65.19 72.80
Less: Fixed cost 52.69 61.40
EBIT 12.50 11.40
Less: Interest 9.27 6.95PBT 3.23 4.45Less: Tax (35%) 1.13 1.56PAT 2.10 2.89Total assets 92.70 92.70Equity 30.90 46.35Debt 61.80 46.35
What would be the effect on companies' profitability and risk if sales fluctuate by 10 percent? If the chemical company intends to acquire a less risky firm, which one should it buy?Give reasons.