Compute and Interpret Z-score Balance sheets and income statements for Lockheed

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.

2004 z-score =

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 27,932 27,637 25,306 Service 5,073 4,765 4,099 Unallocated coporate costs 803 914 443 33,808 33,316 29,848 3,405 2,210 1,976 Other income (expenses), net (449) (121) 43 Operating profit 2,956 2,089 2,019 Interest expense 370 425 487 Earnings before taxes 2,586 1,664 1,532 Income tax expense 761 368 479 Net earnings $ 1,825 $ 1,296 $ 1,053

Explanation / Answer

The original Z-Score formula is:

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 Where

X1: (Current assets - Current liabilities**) / Total assets (**Working capital)

2004: (8973 - 8566) / 25574 = 407 / 25574 = 0.0159

2005: (10409 - 9428) / 27624 = 981 / 27624 = 0.0355

X2: Retained earnings / Total assets

2004: 5915 / 25574 = 0.2313

2005: 7278 / 27624 = 0.2635

X3: Operating profit / Total assets

2004: 2089 / 25574 = 0.0817

2005: 2956 / 27624 = 0.107

X4: Market value of equity / Total liabilities

2004: 440.44563 x 55.55 / 18553** = 1.3187

2005: 434. 264432 x 63.63 / 19757** = 1.3986

**Market value of equity = Shares outstanding (in millions) x Stock closing value on 31st Dec

Total liabilities = Total stockholder equity plus liabilities - Total stockholder equity

X5: Sales / Total assets

2004: 35526 / 25574 = 1.3891

2005: 37123 / 27624 = 1.3439

So,

Z-Score, 2004 = 1.2 x 0.0159 + 1.4 x 0.2313 + 3.3 x 0.0817 + 0.6 x 1.3187 + 1 x 1.3891 = 2.79

Z-Score, 2005 = 1.2 x 0.0355 + 1.4 x 0.2635 + 3.3 x 0.107 + 0.6 x 1.3986 + 1 x 1.3439 = 2.95

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