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 | $ 4,972.59 | $ 3,185.24 |
| Current liabilities | 2,518.39 | 1,484.93 |
| Total assets | 13,491.01 | 11,785.99 |
| Total liabilities | 2,584.38 | 1,736.00 |
| Shares outstanding | 1,364.51 | 1,400.18 |
| Retained earnings | 4,543.35 | 2,824.64 |
| Stock price per share | 31.07 | 44.22 |
| Sales | 5,967.74 | 4,550.40 |
| Earnings before interest and taxes | 1,444.77 | 1,450.18 |
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 = Answer 11.32
2005 z-score = Answer 22.7
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. The z-score has decreased sharply, which suggests the company is in financial distress.
The z-score in 2006 is half of the 2005 score. Both z-scores are well above the score that represents a healthy company.
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.
The correct answer is: The z-score in 2006 is half of the 2005 score. Both z-scores are well above the score that represents a healthy company.