Description

This activity is mandatory and, therefore, evaluable, to be developed individually.

Approach

Textil y confecciones, SA (TECOSA) is a textile company that has two Business Units (BU): Sports Equipment and Upholstery. You are the Director of the Sports Equipment BU, which, as of 31.12.2020, presents the following financial information:

Sales	24.000.000
Cost of sales	14.400.000
Contribution Margin	9.600.000
Cost Structure	800.000
Amortization	750.000
EBIT	8.050.000
Financial Expenses	1.100.000
EBIT	6.950.000
Corporate Tax	2.085.000
EAT	4.865.000
Non-current assets	40.000.000
Working capital	3.000.000
Net investment	43.000.000

 

Carry out the planning for the 2021 financial year, in which the following hypotheses are considered:

• Forecast of quantity sold: 1.5 million units
• Your product has a sales price of €20/unit, with variable costs of €12/unit
• The Structure Costs borne by your BU are estimated at €1 million.
• Average collection period from customers: 30 days
• The average period for selling merchandise 60 days
• The average period for paying suppliers 45 days
• To calculate Working Capital, you can ignore Operating Cash, given its low weight in Current Assets
• To cope with the expected increase in demand, you are considering building a new production plant, which will require investments in Non-Current Assets worth €50 million.
• Considering current investments and assets, depreciation is estimated at €1.3 million.on
• Considering the risk of the business and the financial structure, the Financial Director of TECOSA has informed you that the opportunity cost of capital is 7.84%.

Assuming a corporate tax rate of 30%,

A. Calculate the operating profit (EBIT), ROA, ROCE, and EVA for your BU budget.

Finally, due to the significant reduction in consumption, the amount of product actually sold has been reduced by 1/3 of what was planned. This allows you to postpone the construction of the new manufacturing plant that you had planned to build.

B. Evaluate your management based on: Operating Profit (EBIT), ROA, ROCE and EVA. Which magnitude seems most consistent with the company’s value creation objective?

C. Your remuneration as Director of the Sports Equipment Unit has a variable component that is linked to the annual EVA of your Unit, following the following scale (% bonus referred to the fixed salary):

• Actual EVA lower than planned ⟶ bonus = 0
• Actual EVA equal to or higher than planned by less than 10% ⟶ bonus = 20%
• Actual EVA higher than planned by more than 10% ⟶ bonus = 40%

What measures would you propose to increase the value contributed by your Unit? Quantify some.

D. Assuming that fixed costs and investment do not vary with the quantity produced, considering the “real” scenario,

• Calculate the minimum turnover of the Sports Equipment BU so that it does not destroy value for the company. This is the break-even point from a value-creation perspective.
• Compare the result obtained with the “accounting” break-even point. What is the reason for the difference?

E. Seeing that the end of the year is approaching and the objectives will not be met, you decide to sell some assets (machinery that you are not currently using), worth €10 million. Check that this will allow you to collect the incentives, taking into account the criteria set out in section (c).

Do you think that the Company has really generated value with this decision? How could you resolve an apparent inconsistency between the remuneration criterion and the creation of value for the company?

 

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