Homework SourseCompute and Interpret Zscore Balance sheets and income state
Compute and Interpret Z-score
Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements.
As of December 31, there were the approximate shares outstanding:
2005 - 434,264,432
2004 - 440,445,630
As of December 31, the company\'s stock closed at the following values:
2005 - $63.63
2004 - $55.55
(a) Compute and compare the Altman Z-scores for both years. (Do not round until your final answer; then round your answers to two decimal places.)
2005 z-score = Answer
2004 z-score = Answer
Which of the following explain the trend in the Z-scores from 2004 to 2005? (Select all that apply.)
Answeryesno The market value of Lockheed\'s equity improved somewhat over the year.
Answeryesno Lockheed decreased its liquidity due to an increase in retained earnings.
Answeryesno Lockheed improved its short-term liquidity by increasing cash.
Answeryesno Lcokheed improved its long-term liquidity by decreasing total liabilities.
(b) Which of the following statements best describes the company\'s Altman Z-scores?
The Altman Z-scores have increased from 2004 to 2005 which indicates the company\'s bankruptcy risk has decreased. YES? OR NO
Both the Altman Z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy. YES? OR NO
Both the Altman Z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy. YES? OR NO
The Altman Z-scores have decreased from 2004 to 2005 which indicates the company\'s bankruptcy risk has increased. YES? OR NO
| Income Statement | |||
|---|---|---|---|
| Year Ended December 31 (In millions) | 2005 | 2004 | 2003 |
| Net sales | |||
| Products | $ 31,518 | $ 30,202 | $ 27,290 |
| Service | 5,695 | 5,324 | 4,534 |
| 37,213 | 35,526 | 31,824 | |
| Cost of sales | |||
| Products | 28,800 | 27,879 | 25,306 |
| Service | 5,073 | 4,765 | 4,099 |
| Unallocated coporate costs | 803 | 914 | 443 |
| 34,676 | 33,558 | 29,848 | |
| 2,537 | 1,968 | 1,976 | |
| Other income (expenses), net | 449 | 121 | 43 |
| Operating profit | 2,986 | 2,089 | 2,019 |
| Interest expense | 370 | 425 | 487 |
| Earnings before taxes | 2,616 | 1,664 | 1,532 |
| Income tax expense | 791 | 398 | 479 |
| Net earnings | $ 1,825 | $ 1,266 | $ 1,053 |
Solution
(a) Computation of Altman Z-scores for 2004 and 2005:
Formula for Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where,
A = working capital / total assets
B = retained earnings / total assets
C = earnings before interest and tax / total assets
D = market value of equity / total liabilities
E = sales / total assets
Therefore,
2004 Z-score = 1.2(0.014045148) + 1.4(0.287254119) + 3.3(0.075814764) + 0.6(0.887956549) + 1(1.289322784)
= 2.491295
2005 Z-score = 1.2(0.037015869) + 1.4(0.244688004) + 3.3(0.100389995) + 0.6(0.929002347) + 1(1.251109467)
= 2.52678
Trend in the Z-scores from 2004 to 2005:
Workings for answer (a):
2004
2005
A=working capital/total assets
0.014045148
0.037015869
B=retained earnings/total assets
0.287254119
0.244688004
C=earnings before interest and tax/total assets
0.075814764
0.100389995
D=market value of equity/total liabilities
0.887956549
0.929002347
E=sales/total assets
1.289322784
1.251109467
Computation workings for A:
2004
2005
Total current assets
8953
10529
Total current liabilities
8566
9428
Working capital=Total current assets - total current liabilities
387
1101
Total assets
27554
29744
Therefore, A=working capital/total assets
0.014045148
0.037015869
Computation workings for B:
2004
2005
Retained earnings
7915
7278
Total assets
27554
29744
B=retained workings/total assets
0.287254119
0.244688004
Computation workings for C:
2004
2005
Earnings before interest and tax
2089
2986
Total assets
27554
29744
C=earnings before interest and tax/total assets
0.075814764
0.100389995
Computation workings for D:
2004
2005
Shares outstanding
440445630
434264432
Market value (in $)
55.55
63.63
Market value of equity (in millions) = shares outstanding*market value
24466.75475
27632.24581
Total liabilities
27554
29744
D=market value of equity/total liabilities
0.887956549
0.929002347
Computation workings for E:
2004
2005
Sales
35526
37213
Total assets
27554
29744
E=sales/total assets
1.289322784
1.251109467
*Note : All financial figures in millions.
(b)
| 2004 | 2005 | |
| A=working capital/total assets | 0.014045148 | 0.037015869 |
| B=retained earnings/total assets | 0.287254119 | 0.244688004 |
| C=earnings before interest and tax/total assets | 0.075814764 | 0.100389995 |
| D=market value of equity/total liabilities | 0.887956549 | 0.929002347 |
| E=sales/total assets | 1.289322784 | 1.251109467 |
