80.2K

Verified Solution

Link Copied!

Case Study:

You work in the mergers and acquisitions department of a large conglomerate who is looking to invest in a retail business. Two companies, Fashion Forward and Dream Designs, are the final two options being considered. You have the most recent available income statements and two years of balance sheets below for each company.

Compute the following ratios for each company:

• Profit Margin Ratio
• Return on Assets
• Current Ratio
• Quick Ratio
• AR Turnover Ratio
• Average Collection Period
• Inventory Turnover Ratio
• Average Sales Period
• Debt to Equity Ratio

For this assignment:

• Compute all required amounts and explain how the computations were performed
• Evaluate the results for each company and explain what each ratio means
• Compare and contrast the companies.
• Based on your analysis:
  • recommend which company the organization should pursue
  • Thoroughly support your conclusion, including what other factors should be considered
  • Be specific.

Income Statements
	Fashion Forward		Dream Designs
	31/12/2018		31/12/2018
Revenue
Credit Sales	$2,000,000		$4,320,000
Non-Credit Sales	$500,000		$1,080,000
Total Revenue	$2,500,000		$5,400,000
Cost of Sales	$1,400,000		$3,250,000
Gross Profit	$1,100,000		$2,150,000
Operating Expenses
Research and Development	$50,000		$200,000
Selling, General, and Administrative	$750,000		$1,600,000
Total Operating Expenses	$800,000		$1,800,000
Earnings Before Interest and Taxes	$300,000		$350,000
Interest Expense	-$18,000		-$50,000
Income Before Tax	$282,000		$300,000
Income Tax Expense	-$145,500		-$87,500
Net Income	$136,500		$212,500

Balance Sheets
	Fashion Forward	Fashion Forward		Dream Designs	Dream Designs
	31/12/2018	31/12/2017		31/12/2018	31/12/2017
Current Assets
Cash and Cash Equivalents	$950,000	$980,000		$1,710,000	$1,705,000
Accounts Receivable	$200,000	$150,000		$250,000	$275,000
Miscelanious Receivables	$35,000	$50,000		$120,500	$100,000
Inventory	$112,000	$105,000		$200,000	$215,000
Total Current Assets	$1,297,000	$1,285,000		$2,280,500	$2,295,000
Property, Plant and Equipment	$635,000	$700,000		$850,000	$900,000
Goodwill	$750,000	$750,000		$1,150,000	$1,150,000
Other Long-Term Assets	$65,000	$70,000		$100,750	$105,000
Total Assets	$2,747,000	$2,805,000		$4,381,250	$4,450,000
Current Liabilities
Accounts Payable	$545,000	$535,000		$845,750	$875,000
Short-Term Debt	$25,000	$0		$50,000	$60,000
Other Current Liabilities	$600,000	$510,000		$730,000	$740,000
Total Current Liabilities	$1,170,000	$1,045,000		$1,625,750	$1,675,000
Long-Term Debt	$75,000	$0		$120,500	$130,000
Other Long-Term Liabilities	$100,000	$75,000		$155,000	$165,000
Total Liabilities	$1,345,000	$1,120,000		$1,901,250	$1,970,000
Stockholders Equity
Common Stock	$500,000	$775,000		$749,500	$942,750
Preferred Stock	$150,000	$294,500		$390,000	$409,250
Retained Earnings	$752,000	$615,500		$1,340,500	$1,128,000
Total Stockholders Equity	$1,402,000	$1,685,000		$2,480,000	$2,480,000
Total Liabilities and Stockholders Equity	$2,747,000	$2,805,000		$4,381,250	$4,450,000
	$0	$0		$0	$0

Answer & Explanation Solved by verified expert

See Answer