BGS_case study

Method 2

Calculation of the WACC (after tax) :

Calculation of the after-tax ROA :

Calculation of the EVA :

- or -

Sources :

Analysis for Financial Management, 4th edition, Robert C. Higgins, Irwin, 1995

Principles of Corporate Finance, 8th edition, Richard A. Brealey & Stewart C. Myers, McGraw-Hill

© ECOFINE.COM, Bernard Jaquier, Professor Emeritus & Dr Honoris Causa, Lausanne, Switzerland, 2019

3. Altman Z-Score Model 

Edward Altman, a financial economist and professor at New York’s Stern School of Business, developed Altman’s Z (the Z -Score) in the year 1968. It has gained acceptance by auditors, management accountants, and database systems in 1980s. Altman’s Z -Score formula is a multivariate formula which depends on basic financial ratios to examine the financial performance of a company. It diagnoses the probability that a company will become bankrupt in the next two years. Some research has shown that the model is 72 to 80 percent accurate in predicting bankruptcy one to two years in advance. The original formula was developed on a sample of 66 manufacturing firms. Altman amended the formula to allow its application to certain situations not originally included in the original sample set in the early 2000s. The Z-Score uses various accounting ratios to predict financial distress and future bankruptcy of a firm. To determine the formula, Altman utilized five common business ratios and systematically weighted them in his calculations. The Z-Score was originally constructed as: Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5 Where: Z = Discriminate function score of a firm ‘Z’ -score Components The Z-score is calculated by multiplying the following accounting ratios, which is efficient in predicting bankruptcy.

§ X1 (Working Capital/Total Assets)

§ X2 (Retained Earnings / Total Sales)

§ X3 (Earnings before Interest and Taxes / Total Assets)

§ X4 (Market Value of Equity / Book Value of Total liabilities)

§ X5 (Sales / Total Assets)