I. Case Introduction
Before Chrysler merged to become DaimlerChrysler AG, they were presented with a takeover bid of $55 per share by MGM billionaire Kirk Kerkorian and former Chrysler chairman Lee Iacocca. Kirk Kerkorian was a stockholder in Chrysler and an experienced takeover financier who apparently found Chrysler to be a good buy. Chrysler rejected the offer, however, stating that the firm was not for sale. Further, many Wall Street experts felt that Kerkorian could not come up with the $20 billion necessary to complete the deal.
After Chrysler rejected Kirk Kerkorian’s bid of $55 per share, Kerkorian decided to have his people repeat the analysis of the firm’s financial performance over the two most recent years to determine if he could increase his bid on this friendly takeover attempt. To measure the financial performance of Chrysler over the past two years, key financial ratios will have to be computed and compared with industry averages. To help in this endeavor, Chrysler’s financial statements are also presented.
II. Statement of the Problem
Specifically, this case study aims to respond to the following questions:
1) Compute Chrysler’s financial ratios for the past two years. 2) Compare these ratios to the Industry’s average. Comment on Chrysler’s strengths and weaknesses by ratio category. 3) Should Kerkorian have pursued the purchase of Chrysler? 4) If Kerkorian did not want to takeover Chrysler, what other reasons might he have had for trying to convince other people that Chrysler was a takeover candidate? III. Objective
The objective of this study is to understand and analyze the financial statements, to illustrate the formula in obtaining the financial ratios and to evaluate its meaning. In this study, we portray the financial information of Chrysler Corporation and demonstrate the following financial ratios: Liquidity, Activity, Debt and Profitability, and compare it to the Industry’s averages. IV. Discussion
Analyzing financial statement information is an important element before making a decision to invest in a certain company. At the same time, the massive amount of numbers in a company's financial statements can be difficult and intimidating to many investors. However, through financial ratio analysis, we can be able to work with these numbers in an organize manner. Below are Financial Ratios and its definitions:
Net Working Capital - a measure of both a company's efficiency and its short-term financial health Current Ratio - used to test a company's liquidity by deriving the proportion of current assets available to cover current liabilities Quick Ratio (Acid Test Ratio) – measures the amount of the most liquid current assets there are to cover current liabilities. More conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. 2) ACTIVITY
Inventory Turnover – a ratio showing how many times a company's inventory is sold and replaced over a period Average Age of Inventory - the average number of days it takes for a firm to sell a product it is currently holding as inventory to consumers Average Collection Period – the approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients Fixed Asset Turnover - measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues Total Asset Turnover - the amount of sales generated for each worth of assets 3) DEBT
Debt Ratio - indicates what proportion of...
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