Question

In: Finance

Southwestern Airlines Co. operates a passenger airline thatprovides scheduled air transportation services in the United...

Southwestern Airlines Co. operates a passenger airline that provides scheduled air transportation services in the United States. Its stock trades at $32.50 per share over the NYSE. As of December 31, 2019, the company operated 694 aircraft, including 606 Boeing 737 aircraft and 88 Boeing 717 aircraft. It served 97 destinations in 41 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as 6 near-international countries, including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, and Bermuda. Below is financial data relating to Southwestern Airlines.

Current Assets: 480 million.

Current Liabilities: $ 200 million.

Total assets: $ 800 million.

Retained earnings: $ 215 million.

EBIT: $ 130 million.

Total liabilities: $ 320 million.

Revenues/Sales: $ 950 million.

Book value of equity: $ 340 million.

Market value of equity: $1.50 billion

Required:

i.          Based on the data above, compute the Z-score for Southwestern Airlines.

ii.         Discuss the likelihood of failure for the Company using the appropriate health zone.

Solutions

Expert Solution

Step1

Lets understand the meaning of Z score it is referred to as ZETA in ALTMAN model.It helps us to understand the chances of a company going bankrupt or being in safe zone. It uses certain parameters to find out this value.

Lets see what are those parameters

As per the model Z=1.2A+1.4B+3.3C+0.6D+1.0E

Where

Working

In $(millions)

A

Working Capital/Total Assets ratio

Working capital

=480-200=280

280/800= 0.35

B

Retained Earning/Total Assets ratio3

215/800 =0.26875

C

Earnings Before Interest and Tax/Total Assets ratio

130/800 =0.1625

D

Market Value of Equity/Total Liabilities ratio

1.5 billion=1500million

1500/320=4.6875

E

Sales/Total Assets ratio

950/800 =1.1875

Z=1.2*0.35+1.4*0.26875+3.3*0.1625+0.6*4.6875+1.0*1.1875

5.3325 or 5.33

Below 1.8 high probability of bankruptcy chances

1.8 to 3.0 moderate chance of bankruptcy

Above 3 safe zone

ii) Hence 5.33 z score make Southwest airlines co fall in the safe zone.Hence there is no likelihood of failure or bankruptcy

Some additional information for clarity:

PLEASE NOTE THAT MARKET VALUE OF EQUITY SEEMS TO be DOUBTFUL FIGURE PLEASE CHECK in case THERE IS A CHANGE JUST CHANGE THE VALUE D REST CALCULATION is SAME
ALSO ANOTHER WAY OF CALCULATING MARKET VALUE OF EQUITY=(BOOK VALUE OF EQUITY + retained earnings) by that way market value is (340+215=555million)

jeff jeffy answered 2 years ago
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