Question
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
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?
A. Both Altman z-scores are above 3.00 which indicate the company has a very high probability of bankruptcy.
B. Both Altman z-scores are below 1.80 which indicate the company has a very low probability of bankruptcy.
C. Both Altman z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy.
D. Both Altman z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy.
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Compute and Interpret Liquidity, Solvency and Coverage Ratios Selected balance sheet and income statement information from Verizon Communications follows.
($ millions) | 2005 | 2004 |
---|---|---|
Current assets | $ 15,748 | $ 19,779 |
Current liabilities | 25,063 | 23,129 |
Total liabilities | 101,896 | 103,545 |
Equity | 66,434 | 62,613 |
Earnings before interest and taxes | 12,857 | 12,556 |
Interest expense | 2,180 | 2,384 |
Net cash flow from operating activities | $ 20,412 | $ 20,020 |
(a) Compute the current ratio for each year and discuss any trend in liquidity. (Round your answers to two decimal places.) 2005 current ratio = Answer
2004 current ratio = Answer What additional information about the numbers used to compute this ratio might be useful in helping you assess liquidity? (Select all that apply) Answernoyes The maturity schedule of current liabilities Answernoyes The average stock price for the industry Answeryesno The average current ratio for the industry Answernoyes The amount of current assets that is concentrated in relatively illiquid inventories (b) Compute times interest earned, total liabilities-to-equity, and net cash from operating activities to total debt ratios for each year. Hint: Verizon's total debt was $39,010 and $39,267 in 2005 and 2004 respectively. (Round your answers to two decimal places.) 2005 times interest earned = Answer 2004 times interest earned = Answer 2005 total liabilities-to-equity = Answer 2004 total liabilities-to-equity = Answer 2005 net operating cash flow to total debt = Answer 2004 net operating cash flow to total debt = Answer Which of the following best describes the extent of Verizon's financial leverage and the company's ability to meet interest obligations?
A. Verizon's times interest earned ratio has decreased, total liabilities-to-equity has increased, and net operating cash flow to total debt ratio has increased, which suggests the company will meet its obligations.
B. Verizon's times interest earned ratio has increased, total liabilities-to-equity has decreased, and net operating cash flow to total debt ratio has increased, which suggests the company will meet its obligations.
C. Verizon's times interest earned ratio has increased, total liabilities-to-equity has increased, and net operating cash flow to total debt ratio has decreased, which suggests the company will not meet its obligations.
D. Verizon's times interest earned ratio has increased, total liabilities-to-equity has decreased, and net operating cash flow to total debt ratio has decreased, which suggests the company will not meet its obligations.
(c)Verizon's capital expenditures are expected to increase substantially as it seeks to respond to competitive pressures to upgrade the quality of its communications infrastructure. Which of the following best describes Verizon's liquidity and solvency in light of this strategic direction?
The company's profitability and operating cash flow are fairly strong, both are particularly high in relation to the company's liabilities and interest costs. The capital expenditures can be made with no borrowing or additional equity.
The company's profitability and operating cash flow are fairly weak, both are very low in relation to the company's liabilities and interest costs. The company is on the verge of bankruptcy.
The company's profitability and operating cash flow are fairly strong, neither is particularly high in relation to the company's liabilities and interest costs. The capital expenditures may have to be funded with higher-cost equity.
The company's profitability and operating cash flow are fairly weak, both are very low in relation to the company's liabilities and interest costs. The company cannot fund any capital expenditures.
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Compute and Interpret Liquidity, Solvency and Coverage Ratios Selected balance sheet and income statement information for Calpine Corporation for 2004 and 2006 follows.
($ millions) | 2004 | 2006 |
---|---|---|
Cash | $ 1,256.73 | $ 1,523.36 |
Accounts receivable | 1,097.16 | 735.30 |
Current assets | 3,313.56 | 3,268.33 |
Current liabilities | 3,285.39 | 6,057.95 |
Long-term debt | 17,150.81 | 3,531.63 |
Short-term debt | 1,033.96 | 4,568.83 |
Total liabilities | 22,898.42 | 25,503.17 |
Interest expense | 1,516.90 | 1,288.29 |
Capital expenditures | 1,545.48 | 211.50 |
Equity | 4,587.67 | (7,152.90) |
Cash from operations | 19.89 | 335.98 |
Earnings before interest and taxes | 1,659.84 | 1,907.84 |
(a) Compute the following liquidity, solvency and coverage ratios for both years. (Round your answers to two decimal places.) 2006 current ratio = Answer
2004 current ratio = Answer 2006 quick ratio = Answer 2004 quick ratio = Answer 2006 liabilities-to-equity = Answer 2004 liabilities-to-equity = Answer 2006 long-term debt-to-equity = Answer 2004 long-term debt-to-equity = Answer 2006 times interest earned = Answer 2004 times interest earned = Answer 2006 cash from operations to total debt = Answer 2004 cash from operations to total debt = Answer 2006 free operating cash flow to total debt = Answer 2004 free operating cash flow to total debt = Answer (b) Which of the following best describes the company's credit risk?
Both the quick ratio and current ratio for 2006 are lower than 1.0 and have decreased in the past two years. Along with interest coverage ratios that are exceedingly low, the probability that the company will face default has significantly increased.
Both the quick ratio and current ratio for 2006 are lower than 1.0 and have increased in the past two years. Along with interest coverage ratios that are exceedingly high, the probability that the company will face default has significantly increased.
Both the quick ratio and current ratio for 2006 are above 1.0 and have decreased in the past two years. Along with interest coverage ratios that are exceedingly low, the probability that the company will face default has significantly decreased.
Both the quick ratio and current ratio for 2006 are above 1.0 and have increased in the past two years. Along with interest coverage ratios that are exceedingly high, the probability that the company will face default has significantly decreased.
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Compute and Interpret Altman's Z-scores Following is selected financial information for eBay Inc., for its fiscal years 2013 and 2012.
(In millions, except per share data) | 2013 | 2012 |
---|---|---|
Current assets | $ 23,283 | $ 21,398 |
Current liabilities | 12,639 | 10,924 |
Total assets | 41,488 | 37,074 |
Total liabilities | 17,841 | 16,209 |
Shares outstanding | 1,294 | 1,286 |
Retained earnings | 18,854 | 15,998 |
Stock price per share | 54.87 | 51.00 |
Sales | 16,047 | 14,072 |
Earnings before interest and taxes | 3,371 | 2,888 |
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.) 2013 z-score = Answer
2012 z-score = Answer Which of the following best describes the company's likelihood to go bankrupt given the z-score in 2013 compared to 2014.
A. The z-scores for both 2013 and 2012 are relatively the same. The company is sufficiently healthy for bankruptcy to remain a distant concern.
B. The z-score in 2013 is double the 2012 score. The z-score has increased sharply, which suggests the company has greatly increased the risk of bankruptcy.
C. The z-score in 2013 is half of the 2012 score. The z-score has decreased sharply, which suggests the company is in financial distress.
D. The z-score in 2013 is double the 2012 score. The z-score has increased sharply, which suggests the company has greatly lowered the risk of bankruptcy.
Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements.
Income Statement | |||
---|---|---|---|
Year Ended December 31 (In millions) | 2005 | 2004 | 2003 |
Net sales | |||
Products | $ 31,518 | $ 30,202 | $ 27,290 |
Service | 5,695 | 5,324 | 4,534 |
37,213 | 35,526 | 31,824 | |
Cost of sales | |||
Products | 27,892 | 27,667 | 25,306 |
Service | 5,073 | 4,765 | 4,099 |
Unallocated coporate costs | 803 | 914 | 443 |
33,768 | 33,346 | 29,848 | |
3,445 | 2,180 | 1,976 | |
Other income (expenses), net | (449) | (121) | 43 |
Operating profit | 2,996 | 2,059 | 2,019 |
Interest expense | 370 | 425 | 487 |
Earnings before taxes | 2,626 | 1,634 | 1,532 |
Income tax expense | 801 | 368 | 479 |
Net earnings | $ 1,825 | $ 1,266 | $ 1,053 |
Balance Sheet | ||
---|---|---|
December 31 (In millions) | 2005 | 2004 |
Assets | ||
Cash and cash equivalents | $ 2,484 | $ 1,100 |
Short-term investments | 429 | 396 |
Receivables | 4,579 | 4,094 |
Inventories | 1,921 | 1,864 |
Deferred income taxes | 861 | 982 |
Other current assets | 495 | 557 |
Total current assets | 10,769 | 8,993 |
Property, plant and equipment, net | 3,924 | 3,599 |
Investments in equity securities | 196 | 812 |
Goodwill | 8,447 | 7,892 |
Purchased intangibles, net | 560 | 672 |
Prepaid pension asset | 1,360 | 1,030 |
Other assets | 2,728 | 2,596 |
Total assets | $ 27,984 | $ 25,594 |
Liabilities and stockholders' equity | ||
Accounts payable | $ 1,998 | $ 1,726 |
Customer advances and amounts in excess of costs incurred | 4,331 | 4,028 |
Salaries, benefits and payroll taxes | 1,475 | 1,346 |
Current maturities of long-term debt | 202 | 15 |
Other current liabilities | 1,422 | 1,451 |
Total current liabilities | 9,428 | 8,566 |
Long-term debt | 4,784 | 5,224 |
Accrued pension liabilities | 2,217 | 1,580 |
Other postretirement benefit liabilities | 1,277 | 1,236 |
Other liabilities | 2,411 | 1,967 |
Stockholders' equity | ||
Common stock, $1 par value per share | 432 | 438 |
Additional paid-in capital | 1,724 | 2,223 |
Retained earnings | 7,278 | 5,915 |
Accumulated other comprehensive loss | (1,553) | (1,532) |
Other | (14) | (23) |
Total stockholders' equity | 7,867 | 7,021 |
Total liabilities and stockholders' equity | $ 27,984 | $ 25,594 |
Consolidated Statement of Cash Flows | |||
---|---|---|---|
Year Ended December 31 (In millions) | 2005 | 2004 | 2003 |
Operating Activities | |||
Net earnings | $ 1,825 | $ 1,266 | $ 1,053 |
Adjustments to reconcile net earnings to net cash provided by operating activities | |||
Depreciation and amortization | 555 | 511 | 480 |
Amortization of purchased intangibles | 150 | 145 | 129 |
Deferred federal income taxes | 24 | (58) | 467 |
Changes in operating assets and liabilities: | |||
Receivables | (390) | (87) | (258) |
Inventories | (39) | 519 | (94) |
Accounts payable | 239 | 288 | 330 |
Customer advances and amounts in excess of costs incurred | 296 | (228) | (285) |
Other | 534 | 568 | (13) |
Net cash provided by operating activities | 3,194 | 2,924 | 1,809 |
Investing Activities | |||
Expenditures for property, plant and equipment | (865) | (769) | (687) |
Acquisition of business/investments in affiliated companies | (244) | (91) | (821) |
Proceeds from divestiture of businesses/Investments in affiliated companies | 935 | 279 | 234 |
Purchase of short-term investments, net | (33) | (156) | (240) |
Other | 28 | 29 | 53 |
Net cash used for investing activities | (179) | (708) | (1,461) |
Financing Activities | |||
repayment of long-term debt | (253) | (1,049) | (2,202) |
Issuances of long-term debt | -- | -- | 1,000 |
Long-term debt repayment and issuance costs | (12) | (163) | (175) |
Issuances of common stock | 406 | 164 | 44 |
Repurchases of common stock | (1,310) | (673) | (482) |
Common stock dividends | (462) | (405) | (261) |
Net cash used for financing activities | (1,631) | (2,126) | (2,076) |
Net increase (decrease) in cash and cash equivalents | 1,384 | 90 | (1,728) |
Cash and cash equivalents at beginning of year | 1,100 | 1,010 | 2,738 |
Cash and cash equivalents at end of year | $ 2,484 | $ 1,100 | $ 1,010 |
(a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.) 2005 current ratio = Answer
2004 current ratio = Answer 2005 quick ratio = Answer 2004 quick ratio = Answer Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004?
Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.
The current ratio has increased while the quick ratio has decreased in the period from 2004 to 2005, which suggests the company has a shortage of liquid assets.
Both the current and quick ratios have decreased from 2004 to 2005. The company is fairly illiquid.
The current ratio has decreased while the quick ratio has increased in the period from 2004 to 2005, which suggests the company has a shortage of current assets.
(b) Compute total liabilities-to-equity ratios and long-term debt-to-equity ratios for 2005 and 2004. (Round your answers to two decimal places. For long-term debt-to-equity calculations, use the debt-to-equity ratio.) 2005 total liabilities-to-stockholders' equity = Answer 2004 total liabilities-to-stockholders' equity = Answer 2005 long-term debt-to-equity = Answer 2004 long-term debt-to-equity = Answer Which of the following best describes the company's total liabilities-to-equity ratios and long-term debt-to-equity ratios for 2005 and 2004?
The total liabilities-to-equity ratio has decreased while the long-term debt-to-equity ratio has increased in the period from 2004 to 2005, which suggests the company has decreased the use of short-term debt financing.
Both the total liabilities-to-equity and long-term debt-to-equity ratios have decreased from 2004 to 2005. The difference between these two measures reveals that any solvency concerns would be for the short run.
The total liabilities-to-equity ratio has increased while the long-term debt-to-equity ratio has decreased in the period from 2004 to 2005, which suggests the company has increased the use of short-term debt financing.
Both the total liabilities-to-equity and long-term debt-to-equity ratios have increased from 2004 to 2005. These increases suggest that the company is less solvent.
(c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios. (Round your answers to two decimal places.) 2005 times interest earned = Answer 2004 times interest earned = Answer 2005 cash from operations to total debt = Answer 2004 cash from operations to total debt = Answer 2005 free operating cash flow to total debt = Answer 2004 free operating cash flow to total debt = Answer Which of the following describes the company's times interest earned, cash from operations to total debt, and free operating cash flow to total debt ratios for 2005 and 2004? (Select all that apply) Answernoyes Lockheed Martin's free operating cash flow to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt. Answernoyes Lockheed Martin's cash from operations to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt. Answeryesno Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense. Answernoyes Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase in interest expense. (d) Summarize your findings in a conclusion about the company's credit risk. Do you have any concerns about the company's ability to meet its debt obligations?
Lockheed Martin's times interest earned ratio is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability.
Lockheed Martin's long-term debt-to-equity is very low, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements will depend on increasing short-term debt.
Lockheed Martin's quick ratio is very low, thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on liquidating inventories for emergency cash.
Lockheed Martin's total liabilities-to-equity is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its use of equity financing.
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Compute and Interpret Z-score
Refer to the financial statements for Lockheed Martin Corporation in P4-30 to answer the requirements. As of December 31, 2012 and 2011, there were approximately 322,583,334 and 325,105,500 shares outstanding. The company's stock closed at $92.29 on December 31, 2012, and at $80.90 on December 31, 2011.
Consolidated Statements of Earnings | |||
---|---|---|---|
Year Ended December 31 (In millions) | 2012 | 2011 | 2010 |
Net sales | |||
Products | $ 37,817 | $ 36,925 | $ 36,380 |
Services | 9,365 | 9,574 | 9,291 |
Total net sales | 47,182 | 46,499 | 45,671 |
Cost of sales | |||
Products | (33,495) | (32,968) | (32,539) |
Services | (8,383) | (8,514) | (8,382) |
Severance and other charges | (48) | (136) | (220) |
Other unallocated costs | (1,060) | (1,137) | (686) |
Total cost of sales | (42,986) | (42,755) | (41,827) |
Gross Profit | 4,196 | 3,744 | 3,844 |
Other income, net | 238 | 276 | 261 |
Operating profit | 4,434 | 4,020 | 4,105 |
Interest expense | (383) | (354) | (345) |
Other non-operating income (expense), net | 21 | (35) | 18 |
Earnings before taxes | 4,072 | 3,631 | 3,778 |
Income tax expense | (1,327) | (964) | (1,164) |
Net earnings from continuing operations | 2,745 | 2,667 | 2,614 |
Net (loss) earnings from discontinued operations | -- | (12) | 264 |
Net earnings | $ 2,745 | $ 2,655 | $ 2,878 |
Consolidated Balance Sheets | ||
---|---|---|
December 31 (in millions, except par value) | 2012 | 2011 |
Assets | ||
Current Assets | ||
Cash and cash equivalents | $ 1,898 | $ 3,582 |
Receivables, net | 6,563 | 6,064 |
Inventories, net | 2,937 | 2,481 |
Deferred income taxes | 1,269 | 1,339 |
Other current assets | 1,188 | 628 |
Total current assets | 13,855 | 14,094 |
Property, plant and equipment, net | 4,675 | 4,611 |
Goodwill | 10,370 | 10,148 |
Deferred income taxes | 4,809 | 4,388 |
Other noncurrent assets | 4,948 | 4,667 |
Total assets | $ 38,657 | $ 37,908 |
Liabilities and stockholders' equity | ||
Current Liabilities | ||
Accounts payable | $ 2,038 | $ 2,269 |
Customer advances and amounts in excess of costs incurred | 6,503 | 6,399 |
Salaries, benefits and payroll taxes | 1,649 | 1,664 |
Current maturities of long-term debt | 150 | -- |
Other current liabilities | 1,815 | 1,798 |
Total current liabilities | 12,155 | 12,130 |
Long-term debt | 6,158 | 6,460 |
Accrued pension liabilities | 15,278 | 13,502 |
Other post-retirement benefit liabilities | 1,220 | 1,274 |
Other noncurrent liabilities | 3,807 | 3,541 |
Total Liabilities | 38,618 | 36,907 |
Stockholders' equity | ||
Common stock, $1 par value per share | 321 | 321 |
Additional paid-in capital | -- | -- |
Retained earnings | 13,211 | 11,937 |
Accumulated other comprehensive loss | (13,493) | (11,257) |
Total stockholders' equity | 39 | 1,001 |
Total liabilities and stockholders' equity | $ 38,657 | $ 37,908 |
Consolidated Statement of Cash Flows | |||
---|---|---|---|
Year Ended December 31 (in millions) | 2012 | 2011 | 2010 |
Operating Activities | |||
Net earnings | $ 2,745 | $ 2,655 | $ 2,878 |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||
Depreciation and amortization | 988 | 1,008 | 480 |
Stock-based compensation | 167 | 157 | 129 |
Deferred income taxes | 930 | (2) | 467 |
Severance and other charges | 48 | 136 | |
Reduction in tax expense from resolution of certain tax matter | -- | (89) | (258) |
Tax expense related to Medicare Part D reimbursement | -- | -- | (94) |
Net adjustments related to discontinued operations | -- | (16) | 330 |
Changes in operating assets and liabilities: | |||
Receivables, net | (460) | (363) | 3 |
Inventories, net | (422) | (74) | (207) |
Accounts payable | (236) | 609 | (364) |
Customer advances and amounts in excess of costs incurred | 57 | 502 | 706 |
Post-retirement benefit plans | (1,883) | (393) | (1,027) |
Income taxes | (535) | 304 | 70 |
Other, net | 162 | (181) | 21 |
Net cash provided by operating activities | 1,561 | 4,253 | 3,801 |
Investing Activities | |||
Capital expenditures | (942) | (987) | (1,074) |
Acquisition of business/investments in affiliated | (304) | (649) | (148) |
Net proceeds from sale of EIG | -- | -- | 798 |
Net cash provided by (used for) short-term investment transactions | -- | 510 | (171) |
Other,net | 24 | 313 | 22 |
Net cash used for investing activities | (1,222) | (813) | (573) |
Financing Activities | |||
Repurchases of common stock | (990) | (2,465) | (2,420) |
Proceeds from stock option exercises | 440 | 116 | 59 |
Dividends paid | (1,352) | (1,095) | (969) |
Premium paid on debt exchange | (225) | -- | -- |
Issuance of long-term debt, net of related costs | -- | 1,980 | -- |
Repayments of long-term debt | -- | (632) | -- |
Other, net | (104) | (23) | (28) |
Net cash used for financing activities | (2,023) | (2,119) | (3,358) |
Net change in cash and cash equivalents | (1,684) | 1,321 | (130) |
Cash and cash equivalents at beginning of year | 3,582 | 2,261 | 2,391 |
Cash and cash equivalents at end of year | $ 1,898 | $ 3,582 | $ 2,261 |
(a) Compute and compare the Altman Z-scores for both years. (Do not round until your final answer; then round your answers to two decimal places.) 2012 Z-score = Answer
2011 Z-score = Answer What explains the apparent trend?
There is a slight upward shift in Z-score for 2012. Lockheed earnings declined over the year as well as its market value of equity.
There is a slight downward shift in Z-score for 2012. Lockheed earnings improved over the year as well as its market value of equity.
There is a slight upward shift in Z-score for 2012. Lockheed earnings improved over the year as well as its market value of equity.
There is a slight downward shift in Z-score for 2012. Lockheed earnings declined over the year as well as its market value of equity.
(b) Is the company more likely to go bankrupt given the Z-score in 2012 compared to 2011?
The companys financial health improved slightly, though it still remains in the gray area of interpretation for Altmans Z-score. As long as its Z-score persists at this level or higher, there should be no imminent threat of bankruptcy.
The companys financial health declined slightly, though it still remains in the gray area of interpretation for Altmans Z-score. As long as its Z-score persists at this level or higher, there will be an imminent threat of bankruptcy.
The companys financial health improved greatly, though it still remains in the gray area of interpretation for Altmans Z-score. As long as its Z-score persists at this level or higher, there will be imminent threat of bankruptcy.
The companys financial health declined slightly, though it still remains in the gray area of interpretation for Altmans Z-score. As long as its Z-score persists at this level or higher, there should be no imminent threat of bankruptcy.
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