Corporate Failure

Question 1

What is Z score?

Answer 1

A model that predicts Corporate failure

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

A = working capital / total assets
B = retained earnings / total assets
C = earnings before interest and tax / total assets
D = market value of equity / total liabilities
E = sales / total assets

Question 2

Improvment/Prevention of corporate failure

Answer 2

Strategic Change 
Risk Management 
Product life cycle 
- Balance needed e.g. the decline phase 
- Risks
- KPI /CSFs

Question 3

Symptoms of Corporate Failure

Answer 3

Quantitative

• Declining revenues
• Cash positions
• Increase in contingent liabilities
• Problems with key liquidity, gearing and profitability ratios

Qualitative
-Press
-Warning in chairman’s/drectors report
-

Question 4

Causes of corporate Failure

Answer 4

• Failure to adapt
• Strategic drift
• Inability to raise sufficient funds
• Fairlure of a large project
• Tougher market conditions
• Failure to build a good team
• Failure to control costs
• Failure to control cash
• Poor leadership and management

Question 5

Z Score interpretation

Answer 5

A score below 1.8 is an indication of probable failure.
1.8-3 indicates need for investigations
A core above 3 indicates financial soundness.

Question 6

Advantage and disadvantge of Z score

Answer 6

Advantage

• Calculation is simple
• Objective measure
• Info easily available

Disadvantage

• Not a definite predictor
• outdated model - country, industry , time
• Figures open to manipulation
• Only a good predictor in the short term
• Further analysis needed to fully understand the situation

Question 7

The Argenti Model

Answer 7

A qualitative model

• Defects (Management weakness and accounting deficiencies)
• Mistakes (As a result of defects and high gearing)
• Symptoms of failure ( Bleak financial indicators, creative accounting, low morale)

Question 8

Advantage and disadvantge of Argenti model

Answer 8

Advantage

• Non financial measures
• Ability to use judgement of the investigator
• Potential scope for turnaround

Disadvantge

• Subjective judgement
• Requires large amount of financial and non-financial info
• Does not consider company and industry specific variables
• Does not consider external variables such as inflation