Risk Analysis

64 11289600.4 % Changes in EBIT 0.80 2449. A.44815 0. Not only based on the Mannesmann's risks level but also based on the Vodafone's risk level.00 E(x) 2526. the sales variability of both Vodafone and Mannesmann is high which indicate high business risk of the companies.00 1998 2470.00 0. the board of Vodafone AirTouch shold takes the decision.837382925 Here we see. Sales Variability Sales variability of Vodafone Year Sales 1997 1749.969456774 Sales Variability of Mannesmann Year Sales 1996 18115 1997 19989 1998 19065 E(x) 19056.33 Average of (X-E(x))^2 SD CV (X-E(x))^2 886108.663218708 1999 3360.6 0. II.76 6104852. Business Risk I.3598834 962.Risk Analysis The risk analysis of Vodafone AirTouch's bid for Mannesmann will cover the following types of risks.44 399560121.00 363474225.4023893 1.11811 .00 2470. Degree of Operating Leverage Degree of Operating Leverage of Vodafone 1997 1998 Sales 1749.80 1999 3360.60 Average of (X-E(x))^2 SD CV (X-E(x))^2 604661.412692967 EBIT 538.80 % Changes in sales 0.9 686.429485 0.273705697 DOL 0.00 254640151.48 15957.00 5999704.

00 E(x) 1105.00 -0.9139 Degree of Operating Leverage indicates that for Vodafone and Mannesmann both.6944998 CV 0.Degree of Operating Leverage of Mannesmann 1996 1997 Sales 18115.151181968 1.2355954 0.23688 0.156901869 1998 686.00 % Changes in sales 0.7733852 .103450179 EBIT 954 894 % Changes in EBIT -0.04623 1469 0. Financial Risk I.9 36252.78 1997 894 799236. II.643177 -13.273705697 536.1807611 0.63 SD 691.00 19989.93 SD 996.67 Average of (X-E(x))^2 993399.6 0.3744475 CV 0.8130602 1.96 1999 962.30 Average of (X-E(x))^2 477998.6 926598. Degree of Financial Leverage Vodafone EBIT % Changes in EBIT EBT %Changes in EBT DFL CV 1997 538.062893082 DOL -0.76 E(x) 729.16 1998 686. EBIT Variability Operating income variability of Vodafone Year Operating Income (X-E(x))^2 1997 538. the business risk was high and it had got an increasing trend.901442116 The operating income variability indicates that the Financial risk for both the company is extremely high.947997323 Operating income variability of Mannesmann Year Operating Income (X-E(x))^2 1996 954 23002.60795527 1998 19065.280034384 1.4023893 815.810438773 1999 962.00 1998 1469 2157961.5202961 1.4 471144.4 0.9 465. B.

80% reliability of predicting bankruptcy.759283 1. C. he used a weighting system combined with a set of four or five financial ratios to predict a company’s probability of failure. It was made from the basis of statistical data from public manufacturing companies and eliminated all companies with assets less than $1 million. was created by Edward I. Studies show that the model has 72% . The original Z-Score Model was developed in 1968. the Model "A" Z-Score was developed for use with private manufacturing companies. In our analysis of Vodafone AirTouch and Mennesmann we will use Model B Z-Score FormuaModel B Z-Score for general companies: this model analyzed the characteristics and accuracy of a model without X5 . the higher risk of bankruptcy a company has.694253968 0. Altman created three different Z-Score Models that each serve unique purposes. It can only be used for forecasting if a company being analyzed can be compared to the database. but for Mannesmann. For this.72X3 +1. Bankruptcy Risk predicted by Altman Z score Model The Altman Z-Score.062893082 241.092986227 1998 1469 0. In general analysis. Model "B" was developed for non-public traded general firms and included the service sector. To Dr.4312081 The DFL indicates that although the Financial risk is high for both the company bt for Vodafone it had an indication of downward movement. Dr. the Z-Score does not apply to every situation. However. weighting and overall predictability scoring systems.Mannesmann EBIT % Changes in EBIT EBT %Changes in EBT DFL CV 1996 954 747. It is proven to be very accurate to forecast bankruptcy in a wide variety of contexts and markets. non-manufacturing.26X2 +6. Altman developed two additional models to the original Z-Score Model.275811644 1997 894 -0. Different models have different variables. This original model was not intended for small. and vice visa.9974392 -0. Altman.05X4 . Model B Z-Score = 6.56X1 + 3. Different models have different overall predictability scoring. Probabilities of bankruptcy in the above ranges are 95% for one year and 70% within two years.6431767 306.sales/total assets. The purpose of the Z-Score Model is to measure a company’s financial health and to predict the probability that a company will collapse within 2 years.2645503 4. it got an upward pattern. Altman. the lower the Z-Score.8003724 2. In 1983. or private companies. z score explained an important issue of the time. Later.676369863 3.01793 0. defined as a financial model to predict the likelihood of bankruptcy in a company.

6 interests and taxes market value of equity book value of 85227.260297 >2. Now benchmark to evaluate the bankruptcy risk is as following- Bankruptcy risk prediction for Vodafone: Year ended on March 31 1999 X1 X2 X3 X4 working capital retained earnings total Assets total Assets -738.00929 7718 0. It measures what portion of a company’s assets can decline in value before the liabilities exceed the assets.9 191. X4 = market value of equity/book value of total liabilities.7 Rates 7718 -0.X1 = working capital/total Assets. X2 = retained earnings/total Assets.7 total liabilities Z SCORE 33.308556 earnings before total Assets 1469 interests and taxes market value of equity book value of 79238.52479 >2.34178 earnings before total Assets 962.6 3643.27028 7718 0.7 total liabilities Z SCORE 8.60 .052423 0. X3 = earnings before interests and taxes/total Assets.20279 0.6 3643.01 3643.6 2719. It measures the financial leverage level of a company.264189 31. It measures the net liquid asset of a company relative to the total assets.3 Rates -0.190334 9537 8.60 Bankruptcy risk prediction for Mannessmann: Year ended on March 31 1998 X1 X2 X3 X4 working capital retained earnings total Assets total Assets -2086 71. It measures productivity of a company’s total assets.

devaluation or regulatory changes. however.If we want to compare the two company's position we will clearly notice that Mannesmann is beyond the bankruptcy risky zone. However. Country Risk Country risk refers to the risk of investing in a country. there is no consensus on methodology in assessing credit and political risks. civil war and other potential events contribute to companies' operational risks. Yet it's performance is lower than the Vodafone AirTouch. This term is also sometimes referred to as political risk. whereas political risk providers tend to use qualitative methods. or stability factors such as mass riots. dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country. Germany at a glance (based on the available data of 2012) . financial factors such as currency controls. country risk is a more general term that generally refers only to risks affecting all companies operating within a particular country. Credit rating agencies tend to use quantitative econometric models and focus on financial analysis. For example. focusing on political analysis. D. Political risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure.

5 7.75 .Country Risk of Germany Political Risk Components Sequence Components 1 Government Stability 2 Socioeconomic Condition 3 Investment Profile 4 External Conflict 5 Internal Conflict 6 Corruption 7 Military in Politics 8 Religious Tension 9 Law and Order 10 Ethnic Tension 11 Democratic Accountability 12 Bureaucracy Quality obtained points Economic Risk Components Sequence Components 1 GDP 2 Real GDP Growth 3 Annual Inflation rate 4 Budget Balance as a Percentage of GDP 5 Current Account as a Percentage of GDP total Points (max) 12 12 12 12 12 6 6 6 6 6 6 4 100 Germany 10 8 8 8 7 4 5 4 4 4 5 3 70 Points (max) 5 10 10 10 15 50 Germany 3 6 9.5 Financial Risk Rating Sequence Components 1 2 3 4 5 Points (max) Foreign Debt as a Percentage of GDP 10 Foreign Debt Service as a Percentage of Exports of 10 Goods and Services Current Account as a Percentage of Exports of 15 Goods and Services Net International Liquidity as Months of Import 5 Cover Exchange Rate Stability 10 total 50 Germany 6 6 14 4 6 36 Composite Risk of Germany 72.5 39.5 13.

0 to 49.50% 2.9 points 80.9 points 70.0 to 79.00% As we know.0 to 59. the highest overall rating (theoretically100) indicates the lowest risk.5 point indicates that it has low risk and we will include 1. So our conclusion isRisks Business Risk Financial Risk Bankruptcy Risk Country Risk Total risk to be measured Vodafone Mannesmann High High High initially but has a High decreasing trend Very Low Low Low Moderate Risk Slightly riskier .00% 1. So ICRG 72.9 points 60.Risk Rating Very High Risk High Risk Moderate Risk Low Risk Very Low Risk Points 00.00% 2.0 to 100 points Risk Premium 3.9 points 50.5% risk premium with our discount rate.50% 1.0 to 69. and the lowest rating (theoretically 0) indicates the highest risk.

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