1. Abdulaziz Al-Abdulqader ID 200700707
Intermediate Accounting Case Project Chapter 5 , Case 1: Bankruptcy Prediction Revisited
Abdulaziz Al-Abdulqader ID

2. Introduction
Bankruptcy Prediction Revisited Models used to predict financial distress, A bankruptcy prediction on model pioneered by “Altman” combines balance sheet and income measures in the following equation to derive-score”

3. The Altman Model
Edward Altman found out that companies with z-scores above 3.0 are unlikely to fail into bankruptcy while those with the Z-scores below 1.81 are vey likely to fail. While the original model was held manufacturing companies, the model has been modified to apply to companies in various industries, emerging companies and companies not traded in public markets.

4. The Altman Model EBIT is earnings before interest and taxes
MV equity is the market value of common equity , which can be determined by “stock price X shares outstanding”

5. The Interpretation of Altman Z-Score:
Z-Score above 3.0 –The company is considered ‘Safe’ based on the financial figures only.
Z-Score between 2.7 and 2.99 – ‘On Alert’. This zone is an area where one should ‘Exercise Caution’.
Z-Score between 1.8 and 2.7 – Good chance of the company going bankrupt within 2 years of operations from the date of financial figures given.
Z-Score below1.80- Probability of Financial disaster is very High.

6. Finical Distress Range

7. Case questions and instructions.
(A) Use information in the financial statements of a company like “PepsiCo” or “Coca-Cola” To compute the Z-score for the past 2 years.
(B) interpret your result , where does the company fall in the financial distress range ?

8. Case Solution And Analysis
In our case we chose the coca cola company , first we determine the Working capital = current assets / current liabilities.
21,579,000 / 18,508,000= W/C =1.16
Retained earnings= 49,278,000
Total assets = 72,921,000
EBIT=14,976,000
Sales =35,119,000
MV equity , “shares outstanding x stock price”
=2.27B X 0.49=1,112,300,000
Total liabilities =41,918,000

9. Case Solution And Analysis
Working capital / total assets x1.2
1.16 / 72,921,000=1.59 x 1.2=1.908
Retained earnings / total assets x 1.4
49,278,000/ 72,921,000=0.67 x 1.4=0.93
EBIT / total assets x 3.3
14,976,000/ 72,921,000 =0.20 x 3.3=0.66
Sales/ total assets x 0.99
35,119,000/ 72,921,000=0.48 x 0.99=0.47
MV equity / Total liabilities x 0.6
1,112,300,000 / 41,918,000=26.5 x 0.99=15.9
Total = ,

10. Case Solution And Analysis
With the result of the calculations which is above 3.0 the company is unlikely to suffer the Bankruptcy.
The company doesn't fall in the low range of finical distress range and it considered to be safe financially.

11. Case Solution And Analysis
The reason we believe that Earnings Before Interest and Taxes ”EBIT” Is used in the “Z-Score” because it Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability.

12. Thank you Q&A”S