Question

Bankruptcy Risk and Z-Score Analysis
Following are selected ratios for JetBlue Airways for two recent fiscal years.

Ratio	2016	2015
Current ratio	0.604	0.705
Working capital to total assets	(0.069)	(0.104)
Retained earnings to total assets	0.258	0.194
EBIT to total assets	0.138	0.141
EBITDA to total assets	0.180	0.181
Market value of equity to total liabilities	1.380	1.342
Sales to total assets	0.699	0.742

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.)
2016 z-score = Answer
2015 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 low 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 between 1.80 and 3.00 which indicate the company has some potential of bankruptcy.

Both Altman z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy.

Answer 1

Altman 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 = earnings before interest and tax to total assets

D = market value of equity to total liabilities

E = sales to total assets

For 2016 :

=1.2*(-0.069) + 1.4*0.258 + 3.3*0.138+ 0.6*1.380+ 1*0.699

=(-0.0828) +0.3612+0.4554+0.828+0.699

Z-SCORE =2.2608

For 2015:

= 1.2* (-0.104)+ 1.4*0.194+ 3.3* 0.141+ 0.6*1.342+ 1*0.742

=(−0.1248) +0.2716+0.4653+0.8052+0.742

Z-Score =2.1593

Which of the following statements best describes the company's Altman z-scores?

ANSWER :Both Altman z-scores are between 1.80 and 3.00 which indicate the company has some potential of bankruptcy

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