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Compute and Interpret Altman's Z-scores Following is selected financial information for Netflix, for 2018 and 2017....

Compute and Interpret Altman's Z-scores

Following is selected financial information for Netflix, for 2018 and 2017.

$ thousands, except per share data 2018 2017
Current assets $9,694,135 $7,669,974
Current liabilities 6,487,320 5,466,312
Total assets 25,974,400 19,012,742
Total liabilities 20,735,635 15,430,786
Shares outstanding 436,598,597 433,392,686
Retained earnings 2,942,359 1,731,117
Stock price per share 267.66 191.96
Sales 15,794,341 11,692,713
Earnings before interest and taxes 1,605,226 838,679

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.)
2018 z-score = Answer


2017 z-score = Answer



Which of the following best describes the company's likelihood to go bankrupt given the z-score in 2017 compared to 2018.

The z-score in 2018 increased. Z-scores for both years are in the gray area indicating some risk of bankruptcy.

The z-score in 2018 increased, which suggests the company's risk of bankruptcy has increased.

The z-score in 2018 increased. Z-scores for both years indicate low bankruptcy potential in the short term.

The z-score in 2018 decreased, which suggests the company's risk of bankruptcy has decreased.

Solutions

Expert Solution

Altman Z score of a company is calculated using the following formula

Z score = ( 1.2 x A ) + (1.4 x B ) + (8.3 x C ) + (.6 x D ) + (1.0 x E)

Where

A = Working Capital / Total Assets

B = Retained Earning / Total Assets

C = Earning before Interest and tax / Total Assets

D = Market value of equity / Total Liabilities

E = Sales / Total Assets

For Year 2018

Z score is calculated as follows

Z score = ( 1.2 x .12) + (1.4 x .11) + (3.3 x .06) + ( .6 x 5.63) + (1.0 x .60) = 6.256

Where

A = Working Capital / Total Assets = 3206815/ 25974400 = .12

Working capital = Current Assets - Current Liabilities = 9694135 - 6487320 = 3206815

B = Retained Earning / Total Assets = 2942359 / 25974400 = 0.11

C= Earning before Interest and tax / Total Assets = 1605226 / 25974400 = .06

D = Market value of equity / Total Liabilities = (Share outstanding x Stock price per share ) / Total Liabilities = (436598597 x 267.66) / 20735635 = 5635.70 = 5.63 ( in thousands $)

E = Sales / Total Assets = 15794341 / 25974400 = 0.60

For year 2017

Z Score = (1.2 x 0.11) + ( 1.4 x 0.09) + ( 3.3 x 0.04) + ( 0.6 x 5.39) + ( 1.0 x .61) = 4.23

A = Working Capital / Total Assets = 2203662/ 19012742 = .11

working capital= Current Assets - Current Liabilities = 7669974 - 5466312 = 2203662

B = Retained Earning / Total Assets = 1731117 / 19012742 = .09

C = Earning before Interest and tax / Total Assets = 838679 / 19012742 = 0.04

D = Market value of equity / Total Liabilities = (191.96 x 433392686) / 15430786 = 5391.43 = 5.39 ( in thousand $ )

E = Sales / Total Assets = 11692713 / 19012742 = 0.61

2018 z Score = 6.25

Interpretation - Since the z Score >= 3.0 based on tge financial data the organisation is most likely safe.

2017 z Score = 4.23

Interpretation - here also z score >= 3.0 based on the financial data so the organisation is most likely safe.

The z-score in 2018 increased. z-scores for both years indicate low bankruptcy potential in the short term.

On comparing companies z score in 2018 with its z score in 2017 following option best describes tge company likelihood to go bankrupt

The z Score in 2018 increased. z score for both year indicate low bankruptcy potential in short term.


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