Bankruptcy Risk and Z-Score Analysis

Following are selected ratios for American Airways for two recent fiscal years.

Ratio 2005 2006

Current ratio 0.725 0.740

Working capital to total assets (0.098) (0.089)

Retained earnings to total assets (0.178) (0.183)

EBIT to total assets 0.017 0.060

Market value of equity to total liabilities 0.158 0.254

Sales to total assets 0.784 0.866

Compute and interpret Altman Z-scores for the company for both years. (Do not round until your final answer; then round your answers to two decimal places.)

2005 z-score = Answer

2006 z-score = Answer

Which of the following statements best describes the company's Altman z-scores?

Both Altman z-scores are above 3.00 which indicate the company has a very high probability of bankruptcy.

Both Altman z-scores are below 1.80 which indicate the company has a very low probability of bankruptcy.

Both Altman z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy.

Both Altman z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy.