Compute and Interpret Altman’s Z-scores

Compute and Interpret Altman's Z-scores Following is selected financial information for ebay, for its fiscal years 2005 and 2006.

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.

 

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