## 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.**