Financial Accounting and Reporting (8th Ed) 5.1; 5.13; 5.16

Integrative Case 5.1        Walmart

1. Risk Ratios for Hasbro (calculated with excel)

1. The increases in current ratio are a good indicator that Walmart is working toward becoming more liquid, since this is almost a 1:1 ratio.  The increase in operating cash flow per current liabilities is also an indicator of increased cash flows.  There is no significant change in the days held ratios.  Debt ratios remain relatively steady.  

It is slightly concerning that the interest coverage ratio has decreased, since having cash flow to cover interest expense is important.

The Altman score will tell us that there is a very low probability of bankruptcy for Walmart, since the score is above 3.00.  

Problem 5.13        Calculating and Interpreting Risk Ratios

1.  Risk Ratios for Hasbro (calculations for Year 4 attached)

1. The current ratios of Year 4 and Year 2 are the same, which means that Hasbro’s current assets are 1.5 times its current liabilities, which makes it more liquid.  Additionally, the current ratio continues to be above 1, which, again, is a good indicator of liquidity.   We see a decrease in operating cash flow to total liabilities, which means Hasbro’s ability to generate cash gone down.  We don’t see a huge change in days account receivables or days account payable, but we do see a over two week gap in days inventory held, which leads to the fall in net working capital financing needed.   This shift is positive, as it means Hasbro requires less days of financing.
2. Hasbro’s debt ratios are lower in Year 4 than in Year 2, which would indicate less long-term solvency risk.  Operating cash flow to total liabilities has not changed as much as the other ratios, which would indicate that Hasbro has the ability to generate cash from operations to pay off its debt.   We see an improvement in the interest coverage ratio, and thus less long-term solvency risk.  This ratio indicates Hasbro’s ability to cover more interest charges.

Problem 5.16        Computing and Interpreting Risk and Bankruptcy Prediction Ratios for a Firm That
Declared Bankruptcy

1. Risk ratios for Delta Air Lines, Inc. (calculations attached)

1. Altman’s Z-score for Delta Air Lines, Inc. (calculations attached)

*Calculated on excel

1. Operating cash flow to current liabilities and operating cash flow to total liabilities give us a good indicator of bankruptcy.   At the end of 2004, both of these ratios are negative, which indicate that they are not having positive cash flows.  Additionally, they are increasing their liabilities, as indicated by the increase in their liability to asset ratio.  Delta’s LTD to LTC ratio has increased since 2000, so Delta is highly leveraged.   Finally, after 2000, Delta has had a negative interest coverage ratio, which would indicate that it does not have enough cash flows to cover interest payments, which could be problematic.

When looking at Delta’s Altman Z-Score over the years, it has consistently been under a score of 1.81, which indicates a high probability of bankruptcy.