You are provided with the financial statements for ONE.Tel Limited below. Requir

Question

You are provided with the financial statements for ONE.Tel Limited below.

Required:

(i) compute Altman’s Z score for 1999 and 2000 according to the following discriminant analysis function:

Z = 0.012 (X1) + 0.014 (X2) + 0.033 (X3) + 0.006 (X4) + 0.999 (X5)

X1 = Working capital/total assets;

X2 = Retained earnings/total assets;

X3 = Earnings before interest and taxes/total assets;

X4 = Market value of equity/book value of total liabilities;

X5 = Sales/total assets. (Assume working capital = current assets – current liabilities. Also note that all variables other than X5 are expressed as percentages, whereas sales/total assets is different, i.e. 150% is entered as “1.5” in the model)

(ii) Using the cut-off rules for this model, how distressed was ONE.Tel both one and two years prior to failure? Comment on how well Atman’s Z score model performed in predicting the failure of ONE.Tel.

(iii) How should an analyst interpret the “grey area” in the cut-off rules when classifying financial distressed firms?

(iv) How does multiple discriminant analysis differ from logistic regression? Which model is preferable and under what circumstances?

Company Name Year ONE.Tel LTD 1999 2000 INCOME STATEMENT Trading Revenue Other Revenue Total Revenue (excl Interest) Expenses Reported EBITDA Depreciation Amortisation -tangibles Amortisation - intangibles Depreciation and Amortisation Reported EBIT Interest Revenue Interest Expense Interest Capitalised Reported Net Interest Expense (Income) Reported Pre-Tax Profit Tax Expense (Benefit) Outside Equity Preference Dividends Reported NPAT before Abnormals 30-Jun-99 325.985 4.122 330.107 304.901 25.206 3.051 2.223 7.059 30-Jun-00 653.400 7.900 661.300 891.700 -230.400 12.500 20.100 2.700 12.333 12.873 1.876 3.517 35.300 -265.700 16.900 13.600 1.641 11.232 3.371 3.300 -262.400 4.800 7.861 257.600 Abnormal Gain (Loss) Abnormal Tax Benefit (Expense) Net Abnormal Gain (Loss) 1.400 0.504 0.896 -33.500 0.000 -33.500 NPAT after Abnormals Reported NPAT after Abnormals 6.965 6.965 291.100 291.100 Issued Capital: Ordinary Opening Closing 100.000 1726.425 1326.682 100.000 2618.889 2044.051 Total Weighted Average MARKET DATA Ordinary Share Price (end of year) $ Market Capitalisation Net Debt Enterprise Value 30-Jun-00 $1.10 2880.778 136.200 2744.578 30-Jun-99 1743.689 102.512 1641.177

Explanation / Answer

Z = 0.012 (X1) + 0.014 (X2) + 0.033 (X3) + 0.006 (X4) + 0.999 (X5) X1 = Working capital/total assets; X2 = Retained earnings/total assets; X3 = Earnings before interest and taxes/total assets; X4 = Market value of equity/book value of total liabilities; X5 = Sales/total assets. (Assume working capital = current assets – current liabilities. Also note that all variables other than X5 are expressed as percentages, whereas sales/total assets is different, i.e. 150% is entered as “1.5” in the model) 1999 2000 Current Assets 296.232 628.1 Current Liabilities 84.859 375.2 Working capital 211.373 252.9 Total Assets 525.967 1435.5 Retained earnings 9.075 -282.1 Earnings before Interest and Taxes 12.873 -265.7 Market value of equity 1743.689 2880.778 Total Liabilities 162.937 944.8 Sales 325.985 653.4 X1 40.19% 17.62% 0.012 0.004823 X2 1.73% -19.65% 0.014 0.000242 X3 2.45% -18.51% 0.033 0.000808 X4 1070.16% 304.91% 0.006 0.06421 X5 0.619782 0.455172 0.999 0.619162 1999 Z = 0.012 (X1) + 0.014 (X2) + 0.033 (X3) + 0.006 (X4) + 0.999 (X5) (0.012(40.19%))+(0.014(1.73%))+(0.033(2.45%))+(0.006(1070.16%))+(0.999(0.619782)) Z 0.689245 2000 (0.012(17.62%))+(0.014(-19.65%))+(0.033(-18.51%))+(0.006(304.91%))+(0.999(0.455172)) 0.466267 2) As per Z-score obtain for One in 1999 and 2000 the company was likely to experience bankruptcy. The Z-score was accurate in predicting the stress level in One company

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