A corporation is considering the acquisition of one of its parts suppliers and has been reviewing the pertinent financial statements. Specific data, shown below, has been selected from these statements for review and comparison with industry averages.   B   R   W   Industry   Total sales (millions) $4.27 $3.91 $4.86 $4.30 Net profit margin 9.55% 9.85% 10.05% 9.65% Current ratio 1.32 2.02 1.96 1.95 Return on assets 11.0% 12.6% 11.4% 12.4% Debt/equity ratio 62.5% 44.6% 49.6% 48.3% Financial leverage 1.40 1.02 1.86 1.33 The objective for this acquisition is assuring a steady source of supply from a stable company. Based on the information above, select the strategy that would fulfill the objective.   A.   The corporation should not acquire any of these firms as none of them represents a good risk. B.   Acquire B as both the debt/equity ratio and degree of financial leverage exceed the industry average. C.   Acquire W as the company has the highest net profit margin and degree of financial leverage. D.   Acquire R as both the debt/equity ratio and degree of financial leverage are below the industry average.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A corporation is considering the acquisition of one of its parts suppliers and has been reviewing the pertinent financial statements. Specific data, shown below, has been selected from these statements for review and comparison with industry averages.

 
B
 
R
 
W
 
Industry
 
Total sales (millions)
$4.27
$3.91
$4.86
$4.30
Net profit margin
9.55%
9.85%
10.05%
9.65%
Current ratio
1.32
2.02
1.96
1.95
Return on assets
11.0%
12.6%
11.4%
12.4%
Debt/equity ratio
62.5%
44.6%
49.6%
48.3%
Financial leverage
1.40
1.02
1.86
1.33

The objective for this acquisition is assuring a steady source of supply from a stable company. Based on the information above, select the strategy that would fulfill the objective.

 

  • A.   The corporation should not acquire any of these firms as none of them represents a good risk.
  • B.   Acquire B as both the debt/equity ratio and degree of financial leverage exceed the industry average.
  • C.   Acquire W as the company has the highest net profit margin and degree of financial leverage.
  • D.   Acquire R as both the debt/equity ratio and degree of financial leverage are below the industry average.
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