Question 11.SE.5: Pisces plc produced the following statement of financial pos...
| £m | |
| Non-current assets | |
| 40.0 | Property |
| 80.0 | Machinery and equipment |
| 18.6 | Motor vans |
| \underline{9.0} | Marketable investments |
| \underline{147.6} | |
| Current assets | |
| 45.8 | Inventories |
| 64.6 | Receivables |
| \underline{1.0} | Cash |
| \underline{111.4} | |
| \underline{259.0} | Total assets |
| Equity | |
| 80.0 | Share capital |
| \underline{36.5} | Retained earnings |
| \underline{116.5} | |
| Non-current liabilities | |
| \underline{80.0} | Loan capital |
| Current liabilities | |
| \underline{62.5} | Tade payables |
| \underline{259.0} | Total equity and liabilities |
Income statement for the third year
| £m | |
| 231.5 | Sales revenue |
| (143.2) | Cost of sales |
| 88.3 | Gross profit |
| (43.5) | Wages |
| (14.8) | Depreciation of machinery and equipment |
| (40.0) | R&D costs |
| (10.5) | Allowance for trade receivables |
| (20.5) | Operating loss |
| 0.6 | Income from investments |
| (19.9) | |
| (0.8) | Interest payable |
| (20.7) | Ordinary loss before taxation |
| (6.0) | Restructuring costs |
| (26.7) | Loss before taxation |
| – | Tax |
| (26.7) | Loss for the year |
An analysis of the underlying records reveals the following:
1 R&D costs relate to the development of a new product in the previous year. These costs are written off over a two-year period (starting last year). However, this is a prudent approach and the benefits are expected to last for 16 years.
2 The allowance for trade receivables was created this year and the amount is very high. A more realistic figure for the allowance would be £4 million.
3 Restructuring costs were incurred at the beginning of the year and are expected to provide benefits for an infinite period.
4 The business has a 7 per cent required rate of return for investors.
Required:
Calculate the EVA® for the business for the third year of trading.
Pisces plc
Adjusted NOPAT
| £m | £m | |
| (20.5) | Operating loss | |
| EVA® adjustments | ||
| 35.0 | R&D costs [40 − (1/16 × 80)] (Note 1) | |
| \underline{41.5} | \underline{6.5} | Excess allowance |
| \underline{21.0} | Adjusted NOPAT |
Adjusted net assets (or capital invested)
| £m | £m | |
| 196.5 | Net assets per statement of financial position | |
| Add | ||
| 70.0 | R&D costs (Note 1) | |
| 6.5 | Allowance for trade receivables | |
| \underline{82.5} | \underline{6.0} | Restructuring costs (Note 2) |
| 279.0 | ||
| \underline{(9.0)} | Less Marketable investments | |
| \underline{270.0} | Adjusted net assets |
Notes
1 The R&D costs represent a writing back of £40 million and a writing off of 1/16 of the total cost of the R&D as the benefits are expected to last 16 years.
2 The restructuring costs are added back to the net assets as they provide benefits over an infinite period.
EVA\circledR can be calculated as follows:
EVA\circledR = NOPAT − (R × C)
= £21m − (7% × £270m)
= £2.1m
Thus, the EVA\circledR for the period is positive even though an operating loss was recorded.
This means that shareholder wealth increased during the third year.