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Question

Compute and Interpret Z-score


Balance sheets and income statements for Lockheed Martin

Corporation follow. Refer to these financial statements to answer the requirements.


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 27,892 27,667 25,306

Service 5,073 4,765 4,099

Unallocated coporate costs 803 914 443

33,768 33,346 29,848

3,445 2,180 1,976

Other income (expenses), net (449) (121) 43

Operating profit 2,996 2,059 2,019

Interest expense 370 425 487

Earnings before taxes 2,626 1,634 1,532

Income tax expense 801 368 479

Net earnings $ 1,825 $ 1,266 $ 1,053

Balance Sheet

December 31 (In millions) 2005 2004

Assets

Cash and cash equivalents $ 2,484 $ 1,100

Short-term investments 429 396

Receivables 4,579 4,094

Inventories 1,921 1,864

Deferred income taxes 861 982

Other current assets 495 557

Total current assets 10,769 8,993

Property, plant and equipment, net 3,924 3,599

Investments in equity securities 196 812

Goodwill 8,447 7,892

Purchased intangibles, net 560 672

Prepaid pension asset 1,360 1,030

Other assets 2,728 2,596

Total assets $ 27,984 $ 25,594

Liabilities and stockholders' equity

Accounts payable $ 1,998 $ 1,726

Customer advances and amounts in excess of costs incurred 4,331 4,028

Salaries, benefits and payroll taxes 1,475 1,346

Current maturities of long-term debt 202 15

Other current liabilities 1,422 1,451

Total current liabilities 9,428 8,566

Long-term debt 4,784 5,224

Accrued pension liabilities 2,217 1,580

Other postretirement benefit liabilities 1,277 1,236

Other liabilities 2,411 1,967

Stockholders' equity

Common stock, $1 par value per share 432 438

Additional paid-in capital 1,724 2,223

Retained earnings 7,278 5,915

Accumulated other comprehensive loss (1,553) (1,532)

Other (14) (23)

Total stockholders' equity 7,867 7,021

Total liabilities and stockholders' equity $ 27,984 $ 25,594

Consolidated Statement of Cash Flows

Year Ended December 31 (In millions) 2005 2004 2003

Operating Activities

Net earnings $ 1,825 $ 1,266 $ 1,053

Adjustments to reconcile net earnings to net cash provided by operating activities

Depreciation and amortization 555 511 480

Amortization of purchased intangibles 150 145 129

Deferred federal income taxes 24 (58) 467

Changes in operating assets and liabilities:

Receivables (390) (87) (258)

Inventories (39) 519 (94)

Accounts payable 239 288 330

Customer advances and amounts in excess of costs incurred 296 (228) (285)

Other 534 568 (13)

Net cash provided by operating activities 3,194 2,924 1,809

Investing Activities

Expenditures for property, plant and equipment (865) (769) (687)

Acquisition of business/investments in affiliated companies (244) (91) (821)

Proceeds from divestiture of businesses/Investments in affiliated companies 935 279 234

Purchase of short-term investments, net (33) (156) (240)

Other 28 29 53

Net cash used for investing activities (179) (708) (1,461)

Financing Activities

repayment of long-term debt (253) (1,049) (2,202)

Issuances of long-term debt -- -- 1,000

Long-term debt repayment and issuance costs (12) (163) (175)

Issuances of common stock 406 164 44

Repurchases of common stock (1,310) (673) (482)

Common stock dividends (462) (405) (261)

Net cash used for financing activities (1,631) (2,126) (2,076)

Net increase (decrease) in cash and cash equivalents 1,384 90 (1,728)

Cash and cash equivalents at beginning of year 1,100 1,010 2,738

Cash and cash equivalents at end of year $ 2,484 $ 1,100 $ 1,010

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.)

Answer Lockheed decreased its liquidity due to an increase in retained earnings.

Answer The market value of Lockheed's equity improved somewhat over the year.

Answer Lockheed improved its short-term liquidity by increasing cash.

Answer Lcokheed improved its long-term liquidity by decreasing total liabilities.


(b) Which of the following statements best describes the company's Altman Z-scores?


Both the Altman Z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy.

The Altman Z-scores have increased from 2004 to 2005 which indicates the company's bankruptcy risk has decreased.

Both the Altman Z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy.

The Altman Z-scores have decreased from 2004 to 2005 which indicates the company's bankruptcy risk has increased.

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