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Fsa and Valuation

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Problem 5.16 – Delta Air Lines, Inc. Computing and Interpreting Risk and Bankruptcy Prediction Ratios for a Firm That Declared Bankruptcy. a. (1) Current Ratio: 2000: $3,205/$5,245 = 0.61 2001: $3,567/$6,403 = 0.56 2002: $3,902/$6,455 = 0.60 2003: $4,550/$6,157 = 0.74 2004: $3,606/$5,941 = 0.61 (2) Operating Cash Flow to Current Liabilities Ratio: 2001: $236/0.5($5,245 + $6,403) = 0.041 2002: $225/0.5($6,403 + $6,455) = 0.035 2003: $142/0.5($6,455 + $6,157) = 0.023 2004: $(1,123)/0.5($6,157 + $5,941) = (0.186) (3) Liabilities to Assets Ratio: 2000: $16,354/$21,931 = 0.746 2001: $19,581/$23,605 = 0.830 2002: $23,563/$24,720 = 0.953 2003: $26,323/$25,939 = 1.015 2004: $27,320/$21,801 = 1.253 (4) Long-Term Debt to Long-Term Capital Ratio: 2000: $5,797/($5,797 + $5,577) = 0.510 2001: $7,781/($7,781 + $4,024) = 0.659 2002: $9,576/($9,576 + $1,157) = 0.892 2003: $11,040/($11,040 – $384) = 1.036 2004: $12,507/($12,507 – $5,519) = 1.790 (5) Operating Cash Flow to Total Liabilities Ratio: 2001: $236/0.5($16,354 + $19,581) = 0.013 2002: $225/0.5($19,581 + $23,563) = 0.010 2003: $142/0.5($23,563 + $26,323) = 0.006 2004: $(1,123)/0.5($26,323 + $27,320) = (0.042) (6) Interest Coverage Ratio: 2000: $1,829/$380 = 4.8 2001 to 2004: The interest coverage ratio is negative and, therefore, is not covered.

b. Altman’s Z-Score 2000 Working Capital/Assets: 1.2[($3,205 – $5,245)/$21,931] ..................... (0.112) Retained Earnings/Assets: 1.4($4,176/$21,931).................................... 0.267 EBIT/Assets: 3.3($1,829/$21,931) ........................................................ 0.275 Mkt. Value Equity/Liabilities: 0.6[(123 × $50.185)/$16,354] .............. 0.226 Sales/Assets: 1.0($15,657/$21,931)....................................................... 0.714 Z-Score ................................................................................................ 1.370

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