Read the scenario below, and answer the following questions.You work as a financial analyst at a...

Question

Read the scenario below, and answer the following questions.

You work as a financial analyst at a large automobile corporation that occasionally makes acquisitions of smaller companies that specialize in the production and assembly of small component parts. In order to achieve vertical integration of its newest sports sedan model, the company is evaluating a few manufacturing companies that have experienced strong financial performance in the past few years. These companies would make excellent acquisitions due to the nature and quality of the product and the anticipated ease of transition. You have been tasked to evaluate these companies from a financial perspective and choose one. To do this, you need to brush up on a few concepts by addressing the following topics:

1.) Describe what a crediting rate/score is. Should this be a factor in evaluating companies?

2.) The firm will need to raise funds immediately for the acquisition, and debt will be used. Should the firm borrow on a long-term or short-term basis? Why?

3.) Explain the effect, if any, inflation rates will have on the purchase? How significant is this factor?

4.) Define the relationship between yield curves and the term structure of interest rates.

5.) Explain what would happen to interest rates if a new process was developed that allowed automobiles to run off oil that was formulated based on lemonade? The technology used to convert this liquid to gas would be pricey but well worth it. What impact would this technology have on interest rates?

6.) Discuss what ratios should be used to assess the financial health of the potential acquisition?

Your completed case study must be at least two pages in length, and you must use at least your textbook as a reference. Other references may be used as needed. Adhere to APA Style when creating citations and references for this assignment.

Book Reference:

Melicher, R. W., & Norton, E. A. (2017).Introduction to finance: Markets, investments, and financial management(16th ed.). Wiley. https://online.vitalsource.com/#/books/ XXXXXXXXXX

Sumit · Accepted Answer

1. 
Credit Rating is the assessment of the credit worthiness of the borrower in respect of the financial obligation of the person or any particular debt of the person. A credit rating is generally used when any entity wants to borrow money. In that case credit rating helps to determine the financial ability of the borrower to pay back the borrowed money. Yes, Credit Rating should be considered an important factor in valuing companies, Since Credit rating are based on the due diligence conducted by the rating agencies which helps to determine whether or the borrower should be granted loan and the rate at which the borrower should be grated loan considering the risk profile of the borrower.
2. 
Whether to borrow on a Short-Term basis or a Long-Term basis depends upon the nature of work that the company is raising funds for. Since in our case study the company is raising funds for acquisition, the company should raise long-term funds. The benefits of raising long-term funds are as under:
(a). Long-Term borrowing helps the company to align its capital structure with the long-term strategy of the company.
(b). Duration of the assets purchased by the company due to acquisition will match with the duration of the borrowing. 
3. 
Inflation refers to the increase in price of goods and services and decrease in the value of money.

Read the scenario below, and answer the following questions. You work as a financial analyst at a large automobile corporation that occasionally makes acquisitions of smaller companies that specialize...

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