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.

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.)
Answeryesno The market value of Lockheed's equity improved somewhat over the year.
Answeryesno Lockheed decreased its liquidity due to an increase in retained earnings.
Answeryesno Lockheed improved its short-term liquidity by increasing cash.
Answeryesno Lcokheed improved its long-term liquidity by decreasing total liabilities.

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

The Altman Z-scores have increased from 2004 to 2005 which indicates the company's bankruptcy risk has decreased. YES? OR NO

Both the Altman Z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy. YES? OR NO

Both the Altman Z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy. YES? OR NO

The Altman Z-scores have decreased from 2004 to 2005 which indicates the company's bankruptcy risk has increased. YES? OR NO

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 28,800 27,879 25,306 Service 5,073 4,765 4,099 Unallocated coporate costs 803 914 443 34,676 33,558 29,848 2,537 1,968 1,976 Other income (expenses), net 449 121 43 Operating profit 2,986 2,089 2,019 Interest expense 370 425 487 Earnings before taxes 2,616 1,664 1,532 Income tax expense 791 398 479 Net earnings $ 1,825 $ 1,266 $ 1,053

Explanation / Answer

(a) Computation of Altman Z-scores for 2004 and 2005:

Formula for Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where,

A = working capital / total assets

B = retained earnings / total assets

C = earnings before interest and tax / total assets

D = market value of equity / total liabilities

E = sales / total assets

Therefore,

2004 Z-score = 1.2(0.014045148) + 1.4(0.287254119) + 3.3(0.075814764) +                                                                                          0.6(0.887956549) + 1(1.289322784)

                                                = 2.491295

2005 Z-score = 1.2(0.037015869) + 1.4(0.244688004) + 3.3(0.100389995) +                                                         0.6(0.929002347) + 1(1.251109467)

                        = 2.52678

Trend in the Z-scores from 2004 to 2005:

Workings for answer (a):

2004

2005

A=working capital/total assets

0.014045148

0.037015869

B=retained earnings/total assets

0.287254119

0.244688004

C=earnings before interest and tax/total assets

0.075814764

0.100389995

D=market value of equity/total liabilities

0.887956549

0.929002347

E=sales/total assets

1.289322784

1.251109467

Computation workings for A:

2004

2005

Total current assets

8953

10529

Total current liabilities

8566

9428

Working capital=Total current assets - total current liabilities

387

1101

Total assets

27554

29744

Therefore, A=working capital/total assets

0.014045148

0.037015869

Computation workings for B:

2004

2005

Retained earnings

7915

7278

Total assets

27554

29744

B=retained workings/total assets

0.287254119

0.244688004

Computation workings for C:

2004

2005

Earnings before interest and tax

2089

2986

Total assets

27554

29744

C=earnings before interest and tax/total assets

0.075814764

0.100389995

Computation workings for D:

2004

2005

Shares outstanding

440445630

434264432

Market value (in $)

55.55

63.63

Market value of equity (in millions) = shares outstanding*market value

24466.75475

27632.24581

Total liabilities

27554

29744

D=market value of equity/total liabilities

0.887956549

0.929002347

Computation workings for E:

2004

2005

Sales

35526

37213

Total assets

27554

29744

E=sales/total assets

1.289322784

1.251109467

*Note : All financial figures in millions.

(b)

2004

2005

A=working capital/total assets

0.014045148

0.037015869

B=retained earnings/total assets

0.287254119

0.244688004

C=earnings before interest and tax/total assets

0.075814764

0.100389995

D=market value of equity/total liabilities

0.887956549

0.929002347

E=sales/total assets

1.289322784

1.251109467

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