Bankruptcy Risk and Z-Score Analysis Following are selected ratios for American
ID: 2772174 • Letter: B
Question
Bankruptcy Risk and Z-Score Analysis
Following are selected ratios for American Airways for two recent fiscal years.
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
Explanation / Answer
Altman Z Score can be calculated as follows:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital to Total Assets
B = Retained Earnings to Total Assets
C = EBIT To Total Assets
D = Market Value of Equity To Total Liabilities
E = Sales To Total Assets
Z Score 2005 : 1.2 * (0.098) + 1.4 * (0.178) + 3.3 * 0.017 + 0.6 * 0.158 + 1 * 0.784
= -0.1176 – 0.2492 + 0.0561 + 0.0948 + 0.784 = 0.5681 = 0.57
Z Score 2006 : 1.2 * (0.089) + 1.4 * (0.183) + 3.3 * 0.06 + 0.6 * 0.254 + 1 * 0.866
= -0.1068 – 0.2562 + 0.198 + 0.1524 + 0.866 = 0.8534 = 0.85
Interpretation of Z Score:
A score below 1.8 means that the company is likely to default and file for bankruptcy proceedings. However this likeliness of default increases as the score gets lower.
In both the years the company has a z score below 1.8 which means there is high probability of company becoming bankrupt. However, based on 2015 score, the company has become slightly less risky as Z score has increased in 2015. Nevertheless the score is way below 1.8 and that should categorize the company as highly risky for investment
For a company to be categorized as safe investment, it must have a Z score of 3 or more
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