The Z-score bankruptcy model uses balance sheet and income information to arrive at a Z-Score, which can be used to predict financial distress. The Model follows: Z= ((Working capital / Total assets) x 1.2) + ((Retained earnings/Total assets) x 1.4) + ((EBIT / Total Assets) x 3.3) + ((Sales/Total assets) x 0.99) + ((MV Equity / total liabilities) x 0.6) EBIT is Earnings before Interest and Taxes. MB Equity is the market value of common equity, which can be determined by multiplying stock price by shares outstanding. Following extensive testing, it has been shown that companies with Z-scores above 3.0 are unlikely to fail; those with Z-scores below 1.81 are very likely to fail. While the original model was developed for publicly held manufacturing companies, the model has been modified to apply to companies in various industries, emerging companies, and companies not traded in public markets. For this discussion choose two publicly traded companies that you can find the financial statements for - one obviously profitable and the other either closed or going through bankruptcy (Sears, KMart, etc). Compute the z-scores for the two latest years provided and interpret the results. Where do the company's fall in the financial distress range? Share the companies you chose, the Z-scores for each, and how this information helps you understand the companies. Can you use this model to analyze your own company or others you may be interested in? 49. Comparing Abercrombie & Fitch and TJX Companies Following are selected financial statement data from Abercrombie & Fitch (ANF-upscale clothing retailer) and TJX Companies (TJX-value-priced clothing retailer, including TJ Maxx). $ thousands 2015.. 2016 2015 2016. Company TJX Companies Inc...... TJX Companies Inc... Abercrombie & Fitch. Abercrombie & Fitch... Total Assets Net Income Sales $10,988,750 11,499,482 $2,277,658 $30,944,938 2,505,167 2,443,039 - 35,576 3,518,680 Required a. Compute the return on assets for both companies for the year ended 2016. b. Disaggregate the ROAS for both companies into the profit margin and asset turnover. c. What differences are observed? Evaluate these differences in light of the two companies' business models. Which company has better financial performance? 2. Trading model: As in class, consider a model of a financial market with N assets and M possible outcomes. The payoff of asset n at time t = 1 if outcome m occurs is Dnm, where DERNXM, and its price at time zero is so, where so = RN. A portfolio of stocks is represented by a vector h = RN, where h represents the number of shares owned of asset n. We also define the augmented matrix, D = [-s, D], the reachable payoff space R = {Dh: hRN}, and the augmented payoff space R = {DTh: hRN}. Consider the market with -2 1 1 = -3 1 2 -16 8 9 (a) What is the t = 0 price of the portfolio h = (1,1,0) in this market? (b) Is this market complete? (c) Does the law of one price (LOOP) hold in this market?