Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 5, Problem 16PC
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 5.18 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. We recommend that you create an Excel spreadsheet to compute the values of the ratios and the Altman’s Z-score in Requirements a and b, respectively.
REQUIRED
- a. Compute the value of each the following risk ratios.
- (1) Current ratio (at the end of 2000–2004)
- (2) Operating cash flow to current liabilities ratio (for 2001–2004)
- (3) Liabilities to assets ratio (at the end of 2000–2004)
- (4) Long-term debt to long-term capital ratio (at the end of 2000–2004)
- (5) Operating cash flow to total liabilities ratio (for 2001–2004)
- (6) Interest coverage ratio (for 2000–2004)
- b. Compute the value of Altman’s Z-score for Delta Air Lines for each year from 2000–2004.
- c. Using the analyses in Requirements a and b, discuss the most important factors that signaled the likelihood of bankruptcy of Delta Air Lines in 2005.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Ataway Company has suffered severe financial difficulties and is considering filing a bankruptcy petition. It has the following assets and liabilities. The assets are stated at net realizable value.
Assets (pledged against debts of $74,000)
$
124,000
Assets (pledged against debts of $138,000)
54,000
Other assets
84,000
Liabilities with priority
76,400
Other unsecured creditors
204,000
In a liquidation, how much money would be paid on the partially secured debt?
Miner Company is being forced into bankruptcy. The Company’s creditors and stockholders have requested an estimate of the results of liquidation of the Company. Miner’s trial balance follows:
Accounts
Debit
Credit
Cash
P6,000
Accounts receivable
63,000
Allowance for bad debts
P2,000
Notes receivable
50,000
Accrued interest on notes receivable
1,200
Inventory
60,000
Buildings
182,000
Accumulated depreciation-Buildings
63,000
Equipment
14,600
Accumulated depreciation-Equipment
1,400
Prepaid insurance
1,100
Goodwill
8,500
Accrued wages
6,000
Taxes payable
2,400
Accounts payable and other liabilities
170,000
Notes payable
80,000
Accrued interest payable
1,600
Common stock
110,000
Retained earnings (deficit)
50,000
Total
P436,400
P436,400
The assets are expected to bring cash on…
Miner Company is being forced into bankruptcy. The Company's creditors and stockholders have
requested an estimate of the results of liquidation of the Company. Miner's trial balance follows:
Accounts
Cash
Debit
Credit
P6,000
63,000
Accounts receivable
Allowance for bad debts
P2,000
Notes receivable
50,000
1,200
Accrued interest on notes receivable
Inventory
Buildings
Accumulated depreciation-Buildings
Equipment
Accumulated depreciation-Equipment
Prepaid insurance
60,000
182,000
63,000
14,600
1,400
1,100
Goodwill
8,500
Accrued wages
6,000
2,400
170,000
80,000
1,600
Taxes payable
Accounts payable and other liabilities
Notes payable
Accrued interest payable
Common stock
110,000
Retained earnings (deficit)
50,000
Total
P436,400 P436,400
The assets are expected to bring cash on conversion in the following amounts
Accounts receivable
P50,000
40,800
Notes receivable including P1,000 accrued
interest
Building
75,000
Prepaid insurance
400
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Miner Company is being forced into bankruptcy. The Company's creditors and stockholders have requested an estimate of the results of liquidation of the Company. Miner's trial balance follows: Accounts Debit Credit Cash P6,000 Accounts receivable 63,000 Allowance for bad debts P2,000 Notes receivable 50,000 Accrued interest on notes receivable 1,200 Inventory Buildings Accumulated depreciation-Buildings Equipment Accumulated depreciation-Equipment Prepaid insurance 60,000 182,000 63,000 14,600 1,400 1,100 Goodwill 8,500 Accrued wages Taxes payable Accounts payable and other liabilities Notes payable Accrued interest payable Common stock 6,000 2,400 170,000 80,000 1,600 110,000 50,000 Retained earnings (deficit) Total P436,400 P436 400 The assets are expected to bring cash on conversion in the following amounts Accounts receivable P50,000 Notes receivable including P1,000 accrued interest 40,800 Building 75,000 Prepaid insurance 400arrow_forwardXavier Company is going through a Chapter 7 bankruptcy. All assets have been liquidated, and the company retains only $26,200 in free cash. The following debts, totaling $43,050, remain: Indicate how much money will be paid to the creditor associated with each debt.arrow_forwardAtaway Company has suffered severe financial difficulties and is considering filing a bankruptcy petition. It has the following assets and liabilities. The assets are stated at net realizable value. Assets (pledged against debts of $78,000) Assets (pledged against debts of $146,000) Other assets Liabilities with priority Other unsecured creditors $ 132,000 58,000 88,000 53,200 208,000 In a liquidation, how much money would be paid on the partially secured debt? Payment on partially secured debt $ 82,667arrow_forward
- Mushroom Inc. had an explosion in its plan that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Mushroom made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Mushroom for 70% of its loss. What amount should Mushroom reports as loss from the explosion on its financials? $50,000 $35,000 $18,000 $15,000arrow_forwardWhich of the following statements about WorldCom is true? a. WorldCom filed for Chapter 11 bankruptcy in 2002. b. They overreported the line costs by recording them as liabilities. c. It began in 1999 as Long Distance Discount Services, Inc. d. Five techniques were used to cook its books.arrow_forwardAssume that Kingbird Company has recently fallen into financial difficulties. By reviewing all available evidence on December 31, 2025, one of Kingbird's creditors, the National American Bank, determined that Kingbird would pay back only 65% of the principal at maturity. As a result, the bank decided that the loan was impaired. If the loss is estimated to be $242,200. What entry should National American Bank make to record this loss? (If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. List debit entry before credit entry.) Date Dec. 31, 2025 Account Titles and Explanation Debit Creditarrow_forward
- Jaez Corporation is in the process of going through a reorganization. As of December 31, 2024, the company’s accountant has determined the following information although the company is still several months away from emerging from the bankruptcy proceeding. Net Book Value Fair Value Assets Cash $ 31,000 $ 31,000 Inventory 53,000 55,000 Land 164,000 218,000 Buildings 228,000 268,000 Equipment 162,000 165,000 Allowed Claims Expected Settlement Liabilities as of the date of the order for relief Accounts payable $ 131,000 $ 28,000 Accrued expenses 38,000 12,000 Income taxes payable 30,000 26,000 Note payable (due 2027, secured by land) 108,000 108,000 Note payable (due 2029) 178,000 88,000 Liabilities since the date of the order for relief Accounts payable $ 68,000 Note payable (due 2026) 118,000 Stockholders' equity Common stock $ 208,000 Deficit (241,000) Required: Prepare the balance sheet for Jaez…arrow_forwardLatex Incorporated is undergoing liquidation. The statement of affairs shows unsecured claims without priority of 3,900,000; partially secured liabilities of 2,800,000; unsecured claims with priority of 264,000 and net free assets of 2,519,000. If unsecured claims without priority received 55% of their claims, how much will the partially secured liabilities receive?arrow_forwardXavier Company is going through a Chapter 7 bankruptcy. All assets have been liquidated, and the company retains only $27,200 in free cash. The following debts, totaling $48,050, remain: Government claims to unpaid taxes $ 8,000 Salary during last month owed to Mr. Key (not an officer) 19,825 Administrative expenses 4,450 Salary during last month owed to Ms. Rankin (not an officer) 7,225 Unsecured accounts payable 8,550 Indicate how much money will be paid to the creditor associated with each debt.arrow_forward
- Peltzer Manufacturing is experiencing financial difficulties. Rather than entering into a lengthy bankruptcy proceeding, the company has reached an agreement with its long-term creditors to restructure various loans. The restructured loans are described below.Loan A—This 12% debt has a principal balance of $4,000,000 and accrued interest of $80,000. Under the restructuring agreement, $500,000 of debt would be forgiven, and the balance of the amounts due would be refinanced at a rate of 10% with monthly installment payments of $50,000 and a term of eight years. Assets with a net realizable value of $2,500,000 would also be pledged as additional security against the restructured loan.Loan B—This debt has a principal balance of $1,000,000 and accrued interest of $25,000. Under the restructuring agreement, the accrued interest would be forgiven, and the principal amount would be exchanged for preferred stock with a par value of $500,000 and a fair value of $900,000.Loan C—This 12% debt has…arrow_forwardShi Company is going through a Chapter 7 bankruptcy. All assets have been liquidated, and the company retains only $27,500 in free cash. The following debts, totaling $49,550, remain: Government claims to unpaid taxes Salary during last month owed to Mr. Key (not an officer) Administrative expenses Salary during last month owed to Ms. Rankin (not an officer) Unsecured accounts payable Required: Indicate how much money will be paid to the creditor associated with each debt. Types of Debts Amounts Administrative expenses $ 4,750 Salary during last month owed to Mr. Key and Ms. Rankin Government claims to unpaid taxes $ 0 $ 8,300 20,125 4,750 5,960 8,850arrow_forwardhi Company is going through a Chapter 7 bankruptcy. All assets have been liquidated, and the company retains only $27,400 in free cash. The following debts, totaling $49,050, remain: Government claims to unpaid taxes $ 8,200 Salary during last month owed to Mr. Key(not an officer) 20,025 Administrative expenses 4,650 Salary during last month owed to Ms. Rankin (not an officer) 7,425 Unsecured accounts payable 8,750 Indicate how much money will be paid to the creditor associated with each debt.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License