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Question & Answer: Determine which of two distributors, Morgan Supply or Peachtree Supply, you would recommend to be purchased…..

Determine which of two distributors, Morgan Supply or Peachtree Supply, you would recommend to be purchased by your company. Following is specific information about this assignment,

Your company is considering purchasing one of two general line distributors and has offered a similar price to each distributor. Each distributor has stated that the offered price will be accepted if it is tendered. Each distributor is privately owned.

After the purchase, your company plans to operate the purchased distributor.

One distributor, Morgan Supply, is located in Greenville, South Carolina. The other distributor, Peachtree Supply, is located in Macon, Georgia.

Your company has conducted an extensive due-diligence analysis of both Morgan Supply and Peachtree Supply and has examined each company’s brand, social relationships, culture fit, etc. An extensive economic analysis has been conducted.

Your company has now instructed you to conduct only a financial analysis, of Morgan Supply and Peachtree Supply.

Balance Statements, Income statements, and a Cash Flow

Statements of the two firms for the years 20XX, 20YY and

20ZZ are presented below.

Your instructor has provided a financial ratio analysis of the two firms for each respective year. However, you will be required to calculate certain ratios.

Questions:

(b)         Based only on your financial analysis, which of the two firms should be purchased by your company? Explain.

(c)           Next, suppose that your company will not acquire the $1 million of Morgan’s 20XX long-term debt.

Balance Sheets for Morgan Supply

Dec 31,

20XX

 Dec 31,

20YY

 Dec 31,

20ZZ
Current Assets
Cash 3,100 35,100 80,000
Short-term Investments 200,000 28,000 117,000
Accounts Receivables 325,100 195,300 134,500
Inventories 505,800 460,300 364,200
Prepaid Expenses 50,000 22,000 25,000
Total Current Assets 1,084,000 740,700 720,700
Fixed Assets
Property, Plant & Equipment 2,206,900 1,374,800 1,251,300
Less Accumulated Depreciation 345,100 200,100 100,000
Net Property, Plant & Equipment 1,861,800 1,174,700 1,151,300
Goodwill, net 62,500 75,000 87,500
Total Assets 3,008,300 1,990,400 1,959,500
Current Liabilities
Accounts Payable 418,600 462,100 440,000
Current Maturity-Long Term Debt 69,000 63,000 58,000
Accrued Payroll 50,000 38,000 39,000
Income Taxes Payable 12,000 8,000 5,000
Other Accrued Expenses 8,000 15,000 7,000
Total Current Liabilities 557,600 586,100 549,000
Long-term Liabilities
Long-Term Debt 1,050,400 1,102,900 1,147,000
Total Liabilities 1,608,000 1,689,000 1,696,000
Stockholders’ Equity
Common Stock 1,000 1,000 1,000
Additional Paid-in Capital 1,350,000 400,000 400,000
Retained Earnings 49,300 (99,600) (137,500)
Total Owners’ Equity 1,384,300 301,400 263,500
Total Liabilities & Owners’ Equity 3,008,300 1,990,400 1,959,500

Income Statements for Morgan Supply

Dec 31,

20XX

 Dec 31,

20YY

 Dec 31,

20ZZ
Net Sales 2,600,000 1,900,000 1,600,000
Cost of Goods Sold 1,404,000 1,121,000 960,000
Gross Profit (Margin) 1,196,000 779,000 640,000
Operating Expenses
Salaries & Wages 360,500 250,500 210,720
Vehicle Expenses 34,000 21,000 21,000
Occupancy & Utilities 45,000 32,000 26,000
Depreciation 157,500 112,600 106,100
Advertising 15,000 10,000 5,000
Selling, General &

Administrative

Expense

 286,500 210,400 165,900
Total Operating

Expenses

 898,500 636,500 534,720
Operating Income 297,500 142,500 105,280
Non-operating

Expenses
Interest Expense 85,000 91,000 99,000
Interest income 11,400 6,400 12,500
Income Before Taxes 223,900 57,900 18,700
Taxes 75,000 20,000 7,000
Net Income 148,900 37,900 11,780

Cash Flow Statements for Morgan Supply

Dec 31, 20XX Dec 31, 20YY
Cash     Flow        from    Operating

Activities
Net income 148,900 37,900
Adjustments:
Depreciation 157,500 112,600
Changes in assets and liabilities
Accounts receivable (129,800) (60,800)
Inventories (45,500) (96,100)
Prepaid expenses (28,000) 3,000
Accounts payable (43,500) 22,100
Income taxes payable 4,000 3,000
Accrued payroll 12,000 (1,000)
Other accrued expenses (7,000) 8,000
Net cash provided by operating

activities

 68,600 28,700
Cash      Flow       from      Investing

Activities
Short term investments (172,000) 89,000
Additions    to     property,    plant &

Equipment

 (832,100) (123,500)
Net    cash    used       in investing

Activities

 (1,004,100) (34,500)
Cash      Flow       from      financing

Activities
Capital stock issue 950,000 0
Short-term debt 6,000 5,000
Long-term debt (52,500) (44,100)
Net    cash     used      by financing

activities

 903,500 (39,100)
Net (decrease) in cash (32,000) (44,900)
Cash, beginning of year 35,100 80,000
Cash, end of year 3,100 35,100

Balance Sheet Statement for Peach tree

Dec 31,

20XX

 Dec 31,

20YY

 Dec 31,

20ZZ
Current Assets
Cash 104,800 141,700 115,000
Short-term Investments 0 0 0
Accounts Receivables 295,000 241,400 165,800
Inventories 372,500 357,600 314,800
Prepaid Expenses 21,000 23,400 15,200
Total Current Assets 793,300 764,100 610,800
Fixed Assets
Property, Plant & Equipment 1,526,820 1,308,520 1,265,520
Less Accumulated Depreciation 832,520 776,520 718,520
Net Property, Plant & Equipment 694,300 532,000 547,000
Goodwill, net 0 0 0
Total Assets 1,487,600 1,296,100 1,157,800
Current Liabilities
Accounts Payable 210,600 227,100 218,000
Current Maturity-Long Term Debt 2,200 2,000 1,800
Accrued Payroll 57,000 49,000 47,000
Income Taxes Payable 29,000 23,000 32,000
Other Accrued Expenses 13,800 6,800 12,000
Total Current Liabilities 312,600 307,900 310,800
Long-term Liabilities 18,800 15,700 26,000
Long-Term Debt 43,000 45,000 47,000
Total Liabilities 374,400 368,600 383,800
Stockholders’ Equity
Common Stock
Additional Paid-in Capital 300,500 300,500 300,500
Retained Earnings 812,700 627,000 473,500
Total Owners’ Equity 1,113,200 927,500 774,000
Total Liabilities & Owners’ Equity 1,487,600 1,269,100 1,157,800

Income statement for Peachtree

Dec 31,

20XX

 Dec 31,

20YY

 Dec 31,

20ZZ
Net Sales 2,360,000 2,160,000 2,280,000
Cost of Goods Sold 1,604,800 1,488,200 1,573,200
Gross Profit (Margin) 755,200 671,800 706,800
Operating Expenses
Salaries & Wages 183,700 165,100 170,800
Vehicle Expenses 46,000 41,400 38,900
Occupancy & Utilities 52,500 47,300 50,100
Depreciation 56,000 58,000 52,000
Advertising 12,000 8,000 10,000
Selling, General &

Administrative

Expense

 127,000 123,000 119,000
Total Operating

Expenses

 477,200 442,800 440,800
Operating Income 278,000 229,000 266,000
Non-operating

Expenses
Interest Expense 3,900 4,100 4,300
Interest income 6,600 6,600 6,400
Income Before Taxes 280,700 231,500 268,100
Taxes 95,000 78,000 91,000
Net Income 185,700 153,500 177,100

Cash Flow Statements for Peachtree Supply

Dec 31, XXX Dec 31, YYY
Cash     Flow        from     Operating

Activities
Net income 185,700 153,500
Adjustments:
Depreciation 56,000 58,000
Changes in assets and liabilities
Accounts receivable (53,600) (75,600)
Inventories (14,900) (42,800)
Prepaid expenses 2,400 (8,200)
Accounts payable (16,500) 9,100
Income taxes payable 6,000 (9,000)
Accrued payroll 8,000 2,000
Other accrued expenses 7,000 (5,200)
Net cash provided by operating

activities

 180,100 81,800
Cash      Flow       from        Investing

Activities
Short term investments 0 0
Additions    to    property,       plant &

Equipment

 (218,300) (43,000)
Net    cash    used       in    investing

Activities

 (218,300) (43,000)
Cash      Flow       from       financing

activities
Capital stock issue 0 0
Short-term debt 200 200
Long-term debt 1,100 (12,100)
Net    cash     used      by    financing

activities

 1,300 (1,800)
Net (decrease) in cash (36,900) 26,700
Cash, beginning of year 141,700 115,000
Cash, end of year 104,800 141,700

Expert Answer

 

Financial Ratio Analysis for both companies

20XX 20YY 20ZZ
Sno. Ratios Morgan Supply Peachtree Morgan Supply Peachtree Morgan Supply Peachtree
1 Debt/Equity Ratio
(total Liabilities/Shareholders Equity) 1.16 0.34 5.60 0.40 6.44 0.50
2 Current Ratio
(Current Assets / Current Liabilities) 1.94 2.54 1.26 2.48 1.31 1.97
3 Return On Equity
(Net Income/Shareholder’s Equity) 0.11 0.17 0.13 0.17 0.04 0.23
4 Net Profit Margin
(Net Profit / Net Sales) 0.06 0.08 0.02 0.07 0.01 0.08
5 Debt Service Coverage Ratio
(Net Opearting Income/ Debt Service) 3.31 85.64 1.89 17.72 N.A N.A
Net Operating Income= Total Operating Income + depreciation 455000 334000 255100 287000
Debt Service= Repayment + Interest Expense 137500 3900 135100 16200

Note :

  1. From above ratio analysis, we can clearly the financial performance of peachtree is far better from Morgan Supply
  2. While comparing Debt/equity ratio, it is observed that morgan supply has a very high debt /equity ratio in comparison to Peachtree, which shows the huge dependence of morgan supply company on debt
  3. Even through current ratio, it can be seen that indicators of peachtree is better than morgan supply
  4. while comparing ROE, Morgan supply return has been constantly decreasing year on year but on other hand Peachtree maintains its return consistently at 17 % p.a
  5. Net profit margins are also bit lower of Morgan supply in comparison to peachtree, making overall deal of peachtree more attractive to buy.

Solution 2) If we don’t takeover the loan of 1 million $ of morgan supply, then the financials of both compared again considering this change.

While observing the financial indicators below, The postion will be totally changed if Loan of morgan supply is not taken over, making Morgan supply deal more attractive over Peachtree deal because It directly impacted by reducing total debt and helped in increasing the net income for Morgan as there will be no more interest expense in Morgan supply So here we will prefer Morgan supply over peachtree to buy.

20XX 20YY 20ZZ
Sno. Ratios Morgan Supply Peachtree Morgan Supply Peachtree Morgan Supply Peachtree
1 Debt/Equity Ratio
(total Liabilities/Shareholders Equity) 0.44 0.34 2.29 0.40 2.64 0.50
2 Current Ratio
(Current Assets / Current Liabilities) 1.94 2.54 1.26 2.48 1.31 1.97
3 Return On Equity
(Net Income/Shareholder’s Equity) 0.15 0.17 0.33 0.17 0.29 0.23
4 Net Profit Margin
(Net Profit / Net Sales) 0.08 0.08 0.05 0.07 0.05 dfadf0.08
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