Question

Compute and Interpret Altman's Z-scores Following is selected financial information for ebay, for its fiscal years 2005 and 2006. (In millions, except per share data) 2006 2005 Current assets $4,967.59 $3,180.24 Current liabilities 2,518.39 1,484.93 Total assets 13,491.01 11,785.99 Total liabilities 2,591.38 1,743.00 Shares outstanding 1,372.51 1,408.18 Retained earnings 4,541.35 2,822.64 Stock price per share 35.07 48.22 Sales 5,965,74 4,548.40 Earnings before interest and taxes 1,440.77 1,446.18 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.) 2006 z-score = 0 2005 z-score = 0 Which of the following best describes the company's likelihood to go bankrupt given the Z-score in 2006 compared to 2007 The Z-score in 2006 is double the 2005 score. The Z-score has increased sharply, which suggests the company has greatly increased the risk of bankruptcy. The Z-score in 2006 is half of the 2005 score. Both 2-scores are well above the score that represents a healthy company. The Z-score in 2006 is half of the 2005 score. The 2-score has decreased sharply, which suggests the company is in financial distress. The Z-score in 2006 is double the 2005 score. The Z-score has increased sharply, which suggests the company has greatly lowered the risk of bankruptcy. Please answer all parts of the question.

Answer 1

Answer'- 2006 Z-score = 12.6 2005 z-score = zu. 63 • The e-score in 2006, is half of 2005 score, Both 23coves are well above the score that represents healthy company.! Explanation: 2006 2-score = 1.2A + 1.1 B + 3.36 +0.6D + 1.0E = 1.260.18)+1.460.33) +3.360.10) +0.6(18.57) +100044) . = 0.216 +0.462 +0.33 +11.142 to.un = 12.59 2005 Z-score = 1.2A +1.UB + 3.36 + 0.6 D + 1.0 E = 1.210.14) +120.23) +3.360.12) +06L 38.95) +1.0(0:39) -0.168 + 0.322 +0.396 +23.37 +0.38 = 24.63

working notes'. A = Working Capital Total Assels 2006 $2,499.2. $13,491.01 0.18 1 2005 $1,695.31 $11,785.99 o.14 B- Retalnes Garnings Total Assets show.35 $2;822.64 $13.491.01. 111,785.99 0.33 0.23 C. Earnings befox. Interest.o Taxes Total Assets $1,440.17 $13,491.01 $1,446.18 $11,185.99 0.10 0.12 Ds Market o market value of Equity Book value of Total Liabilities $48,133.92 $2.591.38 $67,902.43 $1,743.00 18.57 38.95

E sales. Total Assets $5,965.74 $13,491.01 O.lik $4548.40 $11,185.99 . : Notes" .) working capital = current Assets - Current Liabilities 2) Market value of Equity = Shares outstanding x stock price per sherred 3) In both 2006 and 2005, 2-score is greater than . . 3, that means ebay is will not declare bankruptcy,

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