Question

St. Louis Airlines operates a passenger airline that provides scheduled air transportation services in the United States. St. Louis Airlines hopes to have a successful IPO by December 2013. As of December 31, 2012, the company operated 694 aircraft, including 606 Boeing 737 aircraft and 88 Boeing 717 aircraft. It served 97 destinations in 41 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as 6 near-international countries, including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, and Bermuda. Below is financial data relating to St. Louis Airlines.  

Working Capital: $ 180 million.

Total assets: $ 875 million.

Retained earnings: $ 215 million.

EBIT: $ 130 million.

Total liabilities: $ 320 million.

Revenues/Sales: $ 950 million.

Book value of equity: $ 340 million.

Required:

i.       Based on the data above, compute the Z-score for Alaska Northwest Airlines.

ii.      Discuss the likelihood of failure for the Company using the appropriate health zone.

Answer 1

Z Score= 1.2A+1.4B+3.3C+0.6D+1.0E

A=Working Capital/Total Assets=180/875=0.205714

B=Retained Earnings/Total Assets=215/875=0.245714

C=Earnings Before Interest and Taxes/Total Assets=130/875=0.148571

D=Market Value of Equities/Total Liabilities=(340+215)/320=1.734375

NOTE: Data on market value of equity is not available

It is assumed( book value +Retained Earnings)reflects the market value

E=Sales/Total Assets=950/875=1.085714

A	0.205714		1.2A=	0.246857
B	0.245714		1.4B=	0.344
C	0.148571		3.3C=	0.490286
D	1.734375		0.6D=	1.040625
E	1.085714		1.0E=	1.085714
			SUM	3.207482

Z Score= 1.2A+1.4B+3.3C+0.6D+1.0E=3.207482

A Company with Z score above 3 is unlikely to go bankrupt.

A company with Z score below 1.8 is likely to fail.

Hence , this company does not have likelihood of failure