Question

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 2005 z-score = Answer.

Answer 1

Given Data :
Particulars	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
No of 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
Now,
Altman Z-Score = 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)
Where,
A = Working Capital / Total Assets
= (Current Assets – Current Assets) / Total Assets
For 2006 = (4972.59-2518.39) / 13491.01	0.18
For 2005 = (3185.24-1484.93) / 11785.99		0.14
B = Retained Earnings / Total Assets
For 2006 = 4543.35 / 13491.01	0.34
For 2005 = 2824.64 / 11785.99		0.24
C = Earnings Before Interest & Taxes / Total Assets
For 2006 = 1444.77 / 13491.01	0.11
For 2005 = 1450.18 / 11785.99		0.12
D = Market Value of Equity / Total Liabilities
= (No of Shares outstanding*Stock Price Per Share) / Total Liabilities
For 2006 = (1364.51*31.07) / 2584.38	16.40
For 2005 = (1400.18*44.22) / 1736		35.67
E = Sales / Total Assets
For 2006 = 5967.74/13491.01	0.44
For 2005 = 4550.4 / 11785.99		0.39
Therefore,
Altman Z-Score = 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)
For 2006 = 1.2(0.18) + 1.4(0.34) + 3.3(0.11) + 0.6(16.40) + 1(0.44)	11.33
For 2005 = 1.2(0.14) + 1.4(0.24) + 3.3(0.12) + 0.6(35.67) + 1(0.39)		22.70
Altman Z-Score of greater than 2.99 means that the entity being measured is safe from bankruptcy.
In the given case the Z-Score in 2006 is half of the 2005 score but as both Z-Scores are well above
2.99 which represents Ebay is a healthy company.