Question

Compute and Interpret Altman's Z-scores

Following is selected financial information for eBay Inc., for its fiscal years 2016 and 2015.

(In millions, except per share data)	2016	2015
Current assets	$ 8,875	$ 7,904
Current liabilities	3,847	2,263
Total assets	23,847	17,755
Total liabilities	13,308	11,179
Shares outstanding	530	741
Retained earnings	14,959	7,713
Stock price per share	29.69	27.48
Sales	8,979	8,592
Earnings before interest and taxes	2,325	2,197

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.)
2016 z-score = Answer
2015 z-score = Answer

Which of the following best describes the company's likelihood to go bankrupt given the z-score in 2015 compared to 2016.

The z-score in 2016 decreased slightly. Z-scores for both years are in the gray area indicating some risk of bankruptcy.

The z-score in 2016 increased slightly, which suggests the company's risk of bankruptcy has increased.

The z-score in 2016 increased slightly. Z-scores for both years are in the gray area indicating some risk for bankruptcy

The z-score in 2016 decreased slightly, which suggests the company's risk of bankruptcy has decreased.

Answer 1

	2016	2015
Current assets	8,875	7,904
Less : current liability	3,847	2,263
Working capital	5,028	5,641
Divided by : Total assets	23,847	17,755
WC/ TA	0.210844	0.317713
Retained earnings	14,959	7,713
Divided by : Total assets	23,847	17,755
RE/ TA	0.627291	0.434413
EBIT (Earnings before interest and tax)	2,325	2,197
Divided by : Total assets	23,847	17,755
EBIT/ TA	0.097497	0.12374
Number of share	530	741
Multiply: Market price per share	29.69	27.48
Market value of equity	15735.7	20362.68
Divided by : Total Liabilities	13,308	11,179
MVE/TL	1.182424	1.821512
Sales	8,979	8,592
Divided by : Total assets	23,847	17,755
Sales/ TA	0.376525	0.48392

Altman Z-scores = 1.2A + 1.4B + 3.3C + 0.6D + 0.99E

where

A = WC/ TA

B = RE/ TA

C = EBIT/ TA

D = MVE/TL

E = Sales/ TA

For year 2016
	results	Multiply by: Weight	Product
WC/ TA	0.210844	1.2	0.253013
RE/ TA	0.627291	1.4	0.878207
EBIT/ TA	0.097497	3.3	0.321739
MVE/TL	1.182424	0.6	0.709454
Sales/ TA	0.376525	0.99	0.37276
Altman Z-scores for Year 2016			2.54
For year 2015
	results	Multiply by: Weight	Product
WC/ TA	0.317713	1.2	0.381256
RE/ TA	0.434413	1.4	0.608178
EBIT/ TA	0.12374	3.3	0.408341
MVE/TL	1.821512	0.6	1.092907
Sales/ TA	0.48392	0.99	0.479081
Altman Z-scores for Year 2015			2.97

Which of the following best describes the company's likelihood to go bankrupt given the z-score in 2015 compared to 2016.

The Altman Z-scores have decreased from 2015 to 2016 which indicates the company's bankruptcy risk has increased.

Z score decreased from 2.97 to 2.54 in year 2016.

The z-score in 2016 decreased slightly. Z-scores for both years are in the gray area indicating some risk of bankruptcy.