A guide to assignment on merger & acquisition of Fashion forward and dream designs. Compute the following ratios: profit margin ratio, return on assets, current ratio, quick ratio, AR turnover ratio, average collection period, inventory turnover ratio, and debt to equity ratio. All calculations are...
MBA Business Administration
University of the People
BUS 5110-Managerial Accounting
Dr. Zelealem Tadesse
October 20, 2021
Case Study:
You work in the mergers and acquisitions department of a large conglomerate who is looking to
invest in a retail business. Two companies, Fashion Forward and Dream Designs, are the final
two options being considered. You have the most recent available income statements and two
years of balance sheets for each company.
Compute the following ratios for each company:
Profit Margin Ratio
Return on Assets
Current Ratio
Quick Ratio
AR Turnover Ratio
Average Collection Period
Inventory Turnover Ratio
Average Sales Period
Debt to Equity Ratio
For this assignment:
Compute all required amounts and explain how the computations were performed. Evaluate the
results for each company and explain what each ratio means. Compare and contrast the
companies. Based on your analysis: recommend which company the organization should pursue
Thoroughly support your conclusion, including what other factors should be considered. Be
specific.
, Ration Analysis
Ratio analysis refers to the analysis of various pieces of financial information in the financial
statements of a business (Corporate Finance Institute, 2020). These analyses are critical to assess
various aspects of a business like liquidity, profitability, and solvency.
Profit Margin Ratio
The profit margin shows the profit generated for each dollar in net sales (Corporate Finance
Institute, 2020).
Profit Margin Ratio = Net Income / Total Revenue
Fashion Forward = 136,,500,000 = 5.46%
Dream Designs = 212,,400,000 = 3.94%
Fashion-forward have a greater profit margin than dream designs meaning it's more profitable.
Return on assets
Return on assets is a ratio of net income to average total assets. This ratio tells us how efficiently
the firm is employing its assets.
Return on Assets = Net Income / Avg. Total Assets
Fashion Forward = 136,500 / (2,747,000 + 2,805,000) / 2 = 136,,776,000 = 4.92%
Dream Designs = 212,500 / (4,381,250 + 4,450,000) /2 = 212,,415,625 = 4.81%
Fashion Forward has better return on assets.
Current Ratio
The current ratio is a liquidity ratio that measures how efficiently a company repays its short-
term loans (Thakur, 2021). Current ratio is calculated as shown below.
Current Ratio = Current Assets / Current Liabilities
Fashion Forward = 1,297,,170,000 = 1.11
Dream Designs = 2,280,,625,750 = 1.40
Dream Designs is managing its short-term loans better than Fashion Forward.
Quick ratio
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller MasterAddis. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $2.99. You're not tied to anything after your purchase.
