2A2Z BORGLUM CORPORATION IS CONSIDERING THE ACQUISITION OF ONE OF ITS...

45.

CSO: 2A2b

LOS: 2A2z

Borglum 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.

Bond

Rockland

Western

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

Borglum’s 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

Borglum’s objective.

a.

Borglum should not acquire any of these firms as none of them represents a good

risk.

b.

Acquire Bond as both the debt/equity ratio and degree of financial leverage

exceed the industry average.

c.

Acquire Rockland as both the debt/equity ratio and degree of financial leverage

are below the industry average.

d.

Acquire Western as the company has the highest net profit margin and degree of

financial leverage.