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5.16 Computing and Interpreting Risk and Bankruptcy Prediction Ratios for a Firm That Declared

Bankruptcy. Delta Air Lines, Inc., is one of the largest airlines in the United States. It has operated on the verge of bankruptcy for several years. Exhibit 5.17 presents selected financial data for Delta Air Lines for each of the five years ending December 31, 2000, to December 31, 2004. Delta Air Lines filed for bankruptcy on September 14, 2005.

Exhibit 5.17Financial Data for Delta Air Lines, Inc. (amounts in millions, except per-share amounts) (Problem 5.16)

53918_05_f17-t2.png

Source: Delta Airlines, Inc., Forms 10-K for the Fiscal Years Ended June 2000-June 2004.

Required

  1. Compute the value of each the following risk ratios.
  • (1)Current ratio (at the end of 2000-2001
  • (2)Operating cash flow to current liabilities ratio (for 2001-2002)
  • (3)Liabilities to assets ratio (at the end of 2000-2001)
  • (4)Long-term debt to long-term capital ratio (at the end of 2000-2001)
  • (5)Operating cash flow to total liabilities ratio (for 2001-2002)
  • (6)Interest coverage ratio (for 2000-2001)


2.Compute the value of Altman's Z-score for Delta Air Lines for each year from 2000 to 2001.

53918_05_f17-t2.png

For Year Ended December 31,
2004
2003
2002
2001
2000
Sales
$15,002
$14,087
$13,866
$13,879
$15,657
Net income (loss) before interest and taxes
$(3,168)
$(432)
$(1,337)
$(1,365)
$1,829
Interest expense
$824
$757
$665
$499
$380
Net income (loss)
$(5,198)
$(773)
S(1,272)
$(1,216)
$828
Current assets
$3,606
$4,550
$3,902
$3,567
$3,205
Total assets
$21,801
$25.939
$24,720
$23,605
$21,931
Current liabilities
$5.941
$6,157
$6,455
$6,403
$5,245
Long-term debt
$12,507
$11,040
$9,576
$7,781
$5,797
Total liabilities
$27,320
$26,323
$23,563
$19,581
$16,354
Retained earnings (deficit)
$(4,373)
$844
$1,639
$2.930
$4,176
Shareholders' equity
$ (5,519)
$ (384)
$1,157
$4,024
$5,577
Cash flow provided by operations
$(1,123)
$142
$225
$236
$2,898
Common shares outstanding
139.8
123.5
123.4
123.2
123.0
Market price per share
$7.48
$11.81
$12.10
$29.26
$50.18

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