Diversified Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly over the last ten years through buyouts of medium-size companies. Diversified does not limit itself to companies in any one industry, but looks for firms with a sound financial base and the ability to stand on their own financially. The president of Diversified recently told a meeting of the companys officers: I want to impress two points on all of you. First, we are not in the business of looking for bargains. Diversified has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family. We dont want companies that may appear to be a bargain on paper but cant survive in the long run. Second, a new member of our family must be able to come in and make it on its ownthe parent is not organized to be a funding agency for struggling subsidiaries. Ron Dixon is the vice president of acquisitions for Diversified, a position he has held for five years. He is responsible for making recommendations to the board of directors on potential acquisitions. Because you are one of his assistants, he recently brought you a set of financials for a manufacturer, Heavy Duty Tractors Inc. Dixon believes that Heavy Duty is a cant-miss opportunity for Diversified and asks you to confirm his hunch by performing basic financial statement analysis on the company. The most recent comparative balance sheets and income statement for the company follow.
1. How liquid is Heavy Duty Tractors? Support your answer with any ratios that you believe are necessary to justify your conclusion. Also indicate any other information that you would want to have in making a final determination on its liquidity.
2. In light of the presidents comments, should you be concerned about the solvency of Heavy Duty Tractors? Support your answer with the necessary ratios. How does the maturity date of the outstanding debt affect your answer?
3. Has Heavy Duty demonstrated the ability to be a profitable member of the Diversified family? Support your answer with the necessary ratios.
4. What will you tell your boss? Should he recommend to the board of directors that Diversified put in a bid for Heavy DutyTractors?
Solvency means the ability of a business to fulfill its non-current financial liabilities. Often you have heard that the company X went insolvent, this means that the company X is no longer able to settle its noncurrent financial...
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Heavy Duty Tractors Inc. Comparative Statements of Financial Position December 31, 2010 December 31, 2009 Current assets: S 48,500 3,750 128,420 135,850 7,600 $324,120 24,980 Marketable securities Accounts receivable, net of allowances 84,120 96,780 9,300 Prepaid items Total current assets S 55,890 Property, plant, and equipment S 45,000 45,000 Buildings and equipment, less accumulated depreciation of $385,000 in 2010 and $325,000 in 2009 Total property, plant, and equipment 545,000 605,000 $ 970.010 Liabilities and Stockholders' Equity Current liabilities Short-term notes Accounts payable Salaries and wages payable Income taxes payable S 60,000 48,760 13,840 65,350 14,360 Total current liabilities Long-term bonds payable, due 2017 Stockholders' equity: $275,000 $275,000 Common stock, no par Retained earnings $350,000 182,710 $532.710 $ 970,010 $350,000 169,820 $519,820 $921,070 Total stockholders' equity Total liabilities and stockholders' equity Heavy Duty Tractors Inc. Statement of Income and Retained Eamings For the Year Ended December 31, 2010 (thousands omitted) Sales revenue $875,250 Cost of goods sold Gross profit Selling, general, and administrative expenses $332,500 264,360 S 68,140 45,000 S 23,140 Operating income Interest expense Net income before taxes and extraordinary items Income tax expense Income before extraordinary items Extraordinary gain, less taxes of $6,000 S 13,890 9,000 S 22,890 Net income Retained earnings, January 1, 2010 $192,710 10,000 $182,710O Dividends paid on common stock Retained earnings, December 31, 2010