Page 2 of 13 ECON3421-WE01 Question 1. X plc is a tech company founded in 2017. In terms of management information, the company's performance measurement system consists of its annual management accounts and annual calculations of its Z score and economic value added (EVA). In April 2020, having analysed the firm's draft management accounts (shown below), X plc's bankers became extremely concerned about the firm's financial condition and started to press very strongly for immediate corrective action. X plc DRAFT INCOME STATEMENTS YEAR ENDING 31ST MARCH ( million) 2018 2019 2020 Net Sales 300 310 325 COGS 200 220 200 Gross Profit 100 90 125 Expenses: Marketing 40 40 75 Allowances: accounts receivable 10 10 25 General 25 35 25 Operating Profit 25 5 Tax (10) - Net Income After Tax 15 5 Dividends (15) (5) Retained Earnings -- Notes to Draft Income Statements: 1. Interest rates were 5% in each year 2. Tax, dividends and interest were paid in the year incurred. CONTINUED Page 3 of 13 ECON3421-WE01 X plc DRAFT STATEMENTS OF FINANCIAL POSITION AT 31ST MARCH ( million) 2018 2019 2020 Property, plant and equipment 15 20 25 Marketable investments 5 5 5 Current Assets Inventories 30 35 40 Accounts receivable 25 25 30 Total Assets 75 85 100 Current Liabilities Accounts payable 10 20 25 Bank loans 15 15 25 25 35 50 Equity 50 50 50 Total Liabilities and Equity 75 85 100 Notes to Draft Statements of Financial Position: 1. Figures for property, plant and equipment are shown net of depreciation 2. Bank loans are secured on property, plant and equipment 3. Equity consisted of ordinary share capital (15 million shares, nominal value 1 each) and accumulated retained earnings 4. Market price per ordinary share at 31st March: 2018, 5.00; 2019, 3.80; 2020, 1.50. ECON3421-WE01 Page 4 of 13 Required: As a Management Consultant to X plc, you are required to prepare and present a report to the firm's shareholders incorporating: (1) A calculation of X plc's Z score for 2020 (see Note 1) (10 marks) (ii) A calculation of X plc's Economic Value Added for the year ended 31 st March 2020 (see Note 2) (60 marks) (iii) Commentary on the business implications of your calculations in (a) and (b) above (15 marks) (iv) A critical analysis of X plc's business performance measurement system.(15 marks) Total 100 marks Note 1: The variant of Altman's Z score model to be applied is: Z = 0.717a + 0.847b + 3.107c+ 0.420d + 0.998 Where a = working capital/total assets b = accumulated retained profits/total assets c = operating profit/total assets d = equity/book value of total liabilities e = sales revenue/total assets. Note 2: . . The 2020 marketing costs of 75m relate to the launch of a new product in 2020; this product launch is expected to confer financial benefits equally in 2020, 2021 and 2022 The 2020 allowances for accounts receivable have been calculated on a very conservative basis, whereas a more realistic basis of calculation has set these allowances at 15m X plc has a weighted average cost of capital of 10% and its rate of tax on operating profits is 25%. . Page 2 of 13 ECON3421-WE01 Question 1. X plc is a tech company founded in 2017. In terms of management information, the company's performance measurement system consists of its annual management accounts and annual calculations of its Z score and economic value added (EVA). In April 2020, having analysed the firm's draft management accounts (shown below), X plc's bankers became extremely concerned about the firm's financial condition and started to press very strongly for immediate corrective action. X plc DRAFT INCOME STATEMENTS YEAR ENDING 31ST MARCH ( million) 2018 2019 2020 Net Sales 300 310 325 COGS 200 220 200 Gross Profit 100 90 125 Expenses: Marketing 40 40 75 Allowances: accounts receivable 10 10 25 General 25 35 25 Operating Profit 25 5 Tax (10) - Net Income After Tax 15 5 Dividends (15) (5) Retained Earnings -- Notes to Draft Income Statements: 1. Interest rates were 5% in each year 2. Tax, dividends and interest were paid in the year incurred. CONTINUED Page 3 of 13 ECON3421-WE01 X plc DRAFT STATEMENTS OF FINANCIAL POSITION AT 31ST MARCH ( million) 2018 2019 2020 Property, plant and equipment 15 20 25 Marketable investments 5 5 5 Current Assets Inventories 30 35 40 Accounts receivable 25 25 30 Total Assets 75 85 100 Current Liabilities Accounts payable 10 20 25 Bank loans 15 15 25 25 35 50 Equity 50 50 50 Total Liabilities and Equity 75 85 100 Notes to Draft Statements of Financial Position: 1. Figures for property, plant and equipment are shown net of depreciation 2. Bank loans are secured on property, plant and equipment 3. Equity consisted of ordinary share capital (15 million shares, nominal value 1 each) and accumulated retained earnings 4. Market price per ordinary share at 31st March: 2018, 5.00; 2019, 3.80; 2020, 1.50. ECON3421-WE01 Page 4 of 13 Required: As a Management Consultant to X plc, you are required to prepare and present a report to the firm's shareholders incorporating: (1) A calculation of X plc's Z score for 2020 (see Note 1) (10 marks) (ii) A calculation of X plc's Economic Value Added for the year ended 31 st March 2020 (see Note 2) (60 marks) (iii) Commentary on the business implications of your calculations in (a) and (b) above (15 marks) (iv) A critical analysis of X plc's business performance measurement system.(15 marks) Total 100 marks Note 1: The variant of Altman's Z score model to be applied is: Z = 0.717a + 0.847b + 3.107c+ 0.420d + 0.998 Where a = working capital/total assets b = accumulated retained profits/total assets c = operating profit/total assets d = equity/book value of total liabilities e = sales revenue/total assets. Note 2: . . The 2020 marketing costs of 75m relate to the launch of a new product in 2020; this product launch is expected to confer financial benefits equally in 2020, 2021 and 2022 The 2020 allowances for accounts receivable have been calculated on a very conservative basis, whereas a more realistic basis of calculation has set these allowances at 15m X plc has a weighted average cost of capital of 10% and its rate of tax on operating profits is 25%