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Colour Group is considering an M&A plan and has identified Green and Yellow who operate in the same industrial sector as its target Below are the financial ratios calculated from financial statement

Colour Group is considering an M&A plan and has identified Green and Yellow who operate in the same industrial sector as its target.

Below are the financial ratios calculated from financial statements of Green and Yellow.

Profitability ratios Green Yellow Industrial average

ROCE before tax % 22 28 20

Return on equity % 18 22 15

Net profit margin % 11 5 7

Gross profit ratio % 25 12 20

Activity ratios

Total assets turnover = times 1.5 4.0 2.5

Fixed asset turnover = times 2.3 12.0 5.1

Receivables collection period in weeks 8.0 5.1 6.5

Inventory holding period in weeks 21.0 4.0 13.0

Liquidity ratios

Current ratio 1.8 1.7 2.8

Acid test 0.5 0.9 1.3

Debt–equity ratio % 80.0 20.0 65.0

Required:

(a) Prepare an analysis report to the directors of Colour Group to assess the performance of these two companies from the information provided, indicate which one you believe to be a better acquision.

May 18 2020 View more View Less

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