Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 5, Problem 10QE
To determine
Explain whether the earnings variable is important in predicting the bankruptcy and interpret the Z-score bankruptcy prediction model.
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Comment on the following statements with suitable example:
i. The ratio return on assets has net income in the numerator and total
assets in the denominator. Explain how each part of the ratio could
cause return on assets to fall.
ii. Explain how return on assets could decline, given an increase in net
profit margin.
iii. If quoted market prices are not available, a personal financial
statement cannot be prepared. Comment.
Suppose a firm's financial statements indicate the following financial ratio values: X1 = 15%, X2 = 15%, X3 = –8%, X4 = 40%, X5 = 1.05. Compute the Z-score using the Altman model.
Task: Eastimate the Altman Z-Score. How do you interpret a Z-score in terms of bankruptcy.
If we run a regression where y (bankruptcy) = f (factors potentially predicting bankruptcy), what is the independent variable?
Multiple Choice
Bankruptcy
Factors potentially predicting bankruptcy
Cannot be determined
There are no dependent variables
Chapter 5 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Ch. 5 - Prob. 1QECh. 5 - Prob. 2QECh. 5 - A firm has experienced an increasing current ratio...Ch. 5 - A firm has experienced a decrease in its current...Ch. 5 - Prob. 5QECh. 5 - A firm had the following values for the four debt...Ch. 5 - Prob. 7QECh. 5 - Prob. 8QECh. 5 - Prob. 9QECh. 5 - Prob. 10QE
Ch. 5 - Market equity beta measures the covariability of a...Ch. 5 - Altmans bankruptcy risk model utilizes the values...Ch. 5 - Calculating and Interpreting Risk Ratios. Refer to...Ch. 5 - Refer to the financial state-ment data for...Ch. 5 - Refer to the profitability ratios of Coca-Cola in...Ch. 5 - Delta Air Lines, Inc., is one of the largest...Ch. 5 - Prob. 17PCCh. 5 - Prob. 18PCCh. 5 - Prob. 19PCCh. 5 - Prob. 20PCCh. 5 - Prob. 21PCCh. 5 - Prob. 22PCCh. 5 - Compute the values of each of the ratios in...
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- II. PROBLEMS. 1. Indicate whether the meaning and and consequences of the following statistical data / ratios which are considered symptoms of failure. Ratio High Low 1. Cash flow to total debt 2. Market Price 3. Working Capital to total asset 4. Retained earnings to total assets 5. EBIT to total assets 6. Market value of equity Book value or Debt 7. Sales to total assetsarrow_forwardTRUE OR FALSE Horizontal analysis is possible for both an income statement and a statement of financial position. Financial analysis is primarily a matter of making relevant mechanical computations. It is possible that a decrease in gross profit rate may be offset by a decrease in expenses, thus resulting in an increase in net income. On a, common-size income statement, net income is given an equivalent of 100% Short-term creditors generally are more concerned with vertical analysis than with horizontal analysis. Percentage changes are usually computed by using the latest figure as a base. Industry standards tend to place the performance of a company in a more meaningful perspective. The peso amount of change during an accounting period for an item appearing in financial statements is less significant than the change measured as a percentage. An increase in sales volume generally is accompanied by a proportionate increase in net income. Common-size financial statements show peso…arrow_forwardwhich one is correct please confirm? QUESTION 7 In using the percentage of sales forecasting method, the assumption is that ______________. a. there is a direct relationship between notes payable and sales b. accounts payable will not increase proportionally with sales c. there is a direct relationship between long-term debt and sales d. inventories will increase proportionately with salesarrow_forward
- Which of the following statements is correct? A. If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method. B. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. C. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed. D. AFN is defined as the funds that a firm must raise internally. E. The AFN equation for forecasting funds requirements requires only a forecast of the firm’s balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.arrow_forwardSusan is reviewing a graph that plots earnings per share (EPS) against earnings before interest and taxes (EBIT). The relationship she has learned from the graph is that the steeper the slope of the plotted line the Multiple Choice lower the impact of financial leverage lower the debt-equity ratio higher the tax rate greater the sensitivity of EPS to changes in EBIT lower the probability of a negative EPSarrow_forwardThe AFN equation and the financial statement–forecasting approach both assume that assets grow at relatively the same rate as sales. However, the relationship between assets and sales is often a little more difficult than that. In particular, some firms use regression analysis to predict the required assets needed to support a given level of sales. Leeding Engines Ltd. has used its historical sales and asset data to estimate the following regression equations: Accounts Receivable = –$94,555 + 0.249(Sales) Inventories = $9,900 + 0.180(Sales) Leeding Engines Ltd. currently has sales of $1,230,000, but it expects sales to grow by 15% over the next year. Use the regression models to calculate Leeding Engines Ltd.’s forecasted values for accounts receivable and inventories needed to support next year’s sales. Forecasted Values for Next Year Accounts receivable Inventories Based on the next year’s accounts receivable and inventory levels…arrow_forward
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