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	Â	Â	Â
Products	$ 31,518	$ 30,202	$ 27,290
Service	5,695	5,324	4,534
Â	37,213	35,526	31,824
Cost of sales	Â	Â	Â
Products	27,892	27,667	25,306
Service	5,073	4,765	4,099
Unallocated coporate costs	803	914	443
Â	33,768	33,346	29,848
Â	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	Â	Â
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
Â	Â	Â
Liabilities and stockholders' equity	Â	Â
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	Â	Â
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	Â	Â	Â
Net earnings	$ 1,825	$ 1,266	$ 1,053
Adjustments to reconcile net earnings to net cash provided by operating activities	Â	Â	Â
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:	Â	Â	Â
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	Â	Â	Â
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	Â	Â	Â
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	Â	Â	Â
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	Â	Â	Â
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	Â	Â
Current Assets	Â	Â
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
Â	Â	Â
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
Â	Â	Â
Liabilities and stockholders' equity	Â	Â
Current Liabilities	Â	Â
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	Â	Â
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	Â	Â	Â
Net earnings	$ 2,745	$ 2,655	$ 2,878
Adjustments to reconcile net earnings to net cash provided by operating activities:	Â	Â	Â
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	Â
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:	Â	Â	Â
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	Â	Â	Â
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	Â	Â	Â
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 companyAc€?cs financial health improved slightly, though it still remains in the Ac€A?gray areaAc€?? of interpretation for AltmanAc€?cs Z-score. As long as its Z-score persists at this level or higher, there should be no imminent threat of bankruptcy.

The companyAc€?cs financial health declined slightly, though it still remains in the Ac€A?gray areaAc€?? of interpretation for AltmanAc€?cs Z-score. As long as its Z-score persists at this level or higher, there will be an imminent threat of bankruptcy.

The companyAc€?cs financial health improved greatly, though it still remains in the Ac€A?gray areaAc€?? of interpretation for AltmanAc€?cs Z-score. As long as its Z-score persists at this level or higher, there will be imminent threat of bankruptcy.

The companyAc€?cs financial health declined slightly, though it still remains in the Ac€A?gray areaAc€?? of interpretation for AltmanAc€?cs Z-score. As long as its Z-score persists at this level or higher, there should be no imminent threat of bankruptcy.