Culam Mining (Culam) is a mineral ore mining business in the country of Teeland. It owns a

Culam Mining (Culam) is a mineral ore mining business in the country of Teeland. It owns and operates four mines. A mine takes on average two years to develop before it can produce ore and the revenue from the mine is split (25:75) between selling the ore under fixed price contracts over five years and selling on the spot market. The bulk of the business’s production is exported. A mine has an average working life of about 20 years before all the profitable ore is extracted. It then takes a year to decommission the site and return the land to a useable form. for agriculture or other developments.

Recently, one of Culam’s foreign competitors surprised the market by becoming insolvent as a result of paying too much to acquire a competitor when the selling price of their minerals dipped as the world economy went into recession. As a result, the chief executive officer (CEO) wanted to know if this was likely to happen to Culam. She had read about the Altman Z-score as a way of predicting corporate failure and had a business analyst prepare a report calculating the Z-score for Culam. The report is summarised below:

Analyst’s Report (extract)

The Altman Z-score model is:

Z = 1·2X1 + 1·4X2 + 3·3X3 + 0·6X4 + X5

Another quantitative model (Q-score model) has been produced by academics working at Teeland’s main university based on recent data from listed companies on the small Teeland stock exchange. It is:

Q = 1·4X1 + 3·3X3 + 0·5X4 + 1·1X5 + 1·7X6

Where for both models:

X1 is working capital/total assets;

X2 is retained earnings reserve/total assets;

X3 is profit before interest and tax/total assets;

X4 is market value of equity/total long-term debt (MVe/total long-term debt);

X5 is revenue/total assets; and

X6 is current assets/current liabilities.

Using the most recent figures from Culam’s financial statements (year ending September 2014), Culam’s Altman Z-score is 3·5 and its score from the other model (Q) is 3·1.

For both models, a score of more than 3 (for Z or Q) is considered safe and at below 1·8, the company is at risk of failure in the next two years.

The analyst had done what was asked and calculated the score but had not explained what it meant or what action should be taken as a result. Therefore, the CEO has turned to you to help her to make sense of this work and for advice about how to use the information and how Culam should proceed into the future.

Required:

(a) Evaluate both the result of the analyst’s calculations and the appropriateness of these two models for Culam. (10 marks)

(b) Explain the potential effects of a mine’s lifecycle on Culam’s Z-score and the company’s probability of failure. Note: You should ignore its effect on the Q-score. (7 marks)

(c) Give four detailed recommendations to reduce the probability of failure of Culam, providing suitable justifications for your advice. (8 marks)

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请帮忙给出正确答案和分析,谢谢!

1 NB Candidates are advised to read all of the information including that contained in tab

1 NB Candidates are advised to read all of the information including that contained in tables 1, 2 and 3 before

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The information contained in notes (i–vii) below relates to Quicklink Ltd in respect of the year ended 31 May

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(ii) Rates for non-contract clients during each of the years ended 31 May 2005 and year ending 31 May 2006,

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Mail 40%

Parcel 20%

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(iii) On 1 June 2003, Quicklink Ltd entered into a fixed price contract for the provision of fuel for its delivery vehicles

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(a) £0·10 per kilometre in respect of the delivery of mail and parcels

(b) £0·50 per kilometre in respect of the delivery of industrial machinery.

Each vehicle owned by Quicklink Ltd is in use for 340 days per annum.

(iv) Employee salaries were paid throughout the year ended 31 May 2005 at a rate of £26,400 per employee, per

annum.

(v) Sundry operating costs (excluding fuel and salaries) of Quicklink Ltd amounted to £3,000,000 during the year

ended 31 May 2005.

(vi) The board of directors expect that for the year ending 31 May 2006 the following will apply:

(a) contract rates of Quicklink Ltd business will increase by 5%

(b) sales volumes are expected to remain at the same level as in the year ended 31 May 2005

(c) salaries and other operating expenses will increase by 4%.

(vii) The board of directors agreed to purchase Celer Transport, an unincorporated business, which was founded in

December 2001. The purchase took effect on 1 June 2005. Celer Transport has main activities comprising the

delivery of mail, parcels and processed food. The managing director of Quicklink Ltd has expressed his view that

‘the acquisition of the Celer Transport business would constitute a good strategic move even though it is expected

to make a loss of £50,000 during the year ending 31 May 2006’.

The information contained in notes (viii–xii) below relates to the business of Celer Transport in respect of the year

ending 31 May 2006:

(viii) A distinctive competence of the Celer Transport business relates to its success in winning contracts with major

food producers. Each contract is for a fixed term of three years and all contracts were renewed on 1 June 2005.

Contract values per annum are as follows:

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4 225,000

6 150,000

9 100,000

(ix) (1) The sales volume of mail and parcel deliveries to Celer Transport clients is expected to increase by 10% per

annum with effect from 1 June 2005. It is intended to use the client billing rates of Quicklink Ltd that were

in application during the year ended 31 May 2005 as the basis of charging for mail and parcel deliveries to

Celer Transport clients during the year ending 31 May 2006. This is due to the fact that Quicklink Ltd had

higher client billing rates than Celer Transport and the board of directors recognised that it would have been

difficult to adopt company-wide billing rates with effect from 1 June 2005.

(2) During the year ended 31 May 2005 the billing rates of Celer Transport in respect of contract and noncontract

mail and parcel deliveries were 90% of the level of the rates charged by Quicklink Ltd.

(x) Fuel requirements for the Celer Transport business activities are forecast to cost £0·12 per kilometre for mail and

parcel deliveries and £0·60 per kilometre for deliveries of processed food. The fuel required for Celer Transport

business during the year ending 31 May 2006 cannot be provided under the current agreement entered into by

Quicklink Ltd as detailed in note (iii). Each Celer Transport vehicle is in use for 340 days per annum.

(xi) All Celer Transport employees will be paid on the same basis as Quicklink Ltd employees.

(xii) Sundry operating costs (excluding fuel and salaries) of the Celer Transport business will amount to £1,990,340.

Required:

(a) Prepare, in columnar format, the budgeted profit and loss accounts for the year ending 31 May 2006 of:

(i) Quicklink Ltd;

(ii) Celer Transport; and

(iii) The combined entity. (16 marks)

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