The financial statements of Tenacity Inc., are presented here.

Balance Sheet Data

	2019	2018
Cash	$ 13,000	$ 5,000
A/R	38,000	24,000
Inventory	27,000	20,000
PPE	80,000	78,000
Acc. Depreciation	(30,000)	(24,000)
Goodwill	5,000	16,000
Total assets	$133,000	$119,000
Liabilities and Equity
A/P	$ 17,000	$ 15,000
Salaries/P	1,900	2,100
Tax/P	1,000	4,000
Bank loan payable	34,100	50,650
C/S	18,000	14,000
R/E	56,000	28,250
AOCI	5,000	5,000
Total liabilities and Equity	$133,000	$119,000

I/S for the year Ended December 31, 2019

Sales	$256,000
CGS	140,000
GP	116,000
Operating expenses	78,250
Profit from operations (EBIT)	37,750
Interest exp	4,000
EBT	33,750
Tax exp	6,000
NI	$ 27,750

Additional information:

1.

Equipment was sold during the year for $8,500 cash. The equipment originally cost $12,000 and had a carrying value of $8,500 at the time of sale.

2.

Equipment costing $14,000 was purchased in exchange for $4,000 cash and a $10,000 long-term bank loan.

3

A/P relates to merchandise creditors.

4.

Some of the bank loan was repaid during the year.

5.

Operating expenses comprise $9,500 depreciation expense, &7,750 of admin expenses, $50,000 of salaries expense, and an $11,000 impairment loss on goodwill.

(i)

Recast B/S into 3-components

2014 2015 Average

NOA

NNO

EQ

(ii)

Calculate the following I/S items:

NOPAT

NNE

Tax on Operating profit = Tax expense + Pre-tax net nonoperating expense * tax rate

Tax Shield

(iii)

RNOA = NOPAT/NOA

NNEP = NNE/NNO

ROE = NI/EQ

Verify that ROE = RNOA + Spread*FLEV, where FLEV = NNO/EQ and Spread = RNOA - NNEP

Compute the Z-score and assess the bankruptcy potential for the company. Assume MVE = 1.25*BV (of equity)