Bankruptcy Risk and Z-Score Analysis
Following are selected ratios for JetBlue Airways for two recent fiscal years.
|Working capital to total assets||(0.072)||0.031|
|Retained earnings to total assets||0.061||0.043|
|EBIT to total assets||0.053||0.046|
|Market value of equity to total liabilities||0.278||0.251|
|Sales to total assets||0.705||0.637|
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.)
2012 z-score = Answer
2011 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 above 3.00 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.
Altman Z Score is a tool for checking the credit strength test of an organisation
Altman Z Score Formula = 1.2A + 1.4B + 3.3C + 0.6D + 1E
Where, A = Working Capital / Total Assets
B = Retained earnings / Total Assets
C = Earnings Before Interest and Tax / Total Assets
D = Market Value of equity / Total liabilities
E = Sales / Total Assets
Z Score for 2011 = 1.2 x 0.031 + 1.4 x 0.043 + 3.3 x 0.046 + 0.6 x 0.251 + 1 x 0.637 = 1.0368
Z Score for 2012 = 1.2 x -0.072 + 1.4 x 0.061 + 3.3 x 0.053 + 0.6 x 0.278 + 1x 0.705 = 1.0457
Generally, Z Score below 1.8 means there is a high probability of the company going bankrupt and a score of more than 3 means there are less chances of a company going bankrupt
Hence, Both the Z Scores are less than 1.8 which indicate the company has high probability of bankruptcy
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