COMPUTING AND INTERPRETING RISK AND BANKRUPTCY PREDICTION RATIOS FOR A FIRM THAT DECLARED BANKRUPTCY. Delta Air Lines 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 Parts a and b, respectively.
Financial Data for Delta Air Lines
(amounts in millions except per share amounts) (Problem 5.15)
Financial Data for Delta Air Lines
(amounts in millions except per share amounts) (Problem 1) |
|
Year EndedDecember 31:
|
2004
|
2003
|
2002
|
2001
|
2000
|
|
Sales
Net Income (Loss) before Interest and Taxes
|
$15,002
$(3,168)
|
$14,087
$ (432)
|
$13,866
$(1,337)
|
$13,879
$(1,365)
|
$15,657
$ 1,829
|
|
Interest Expense
|
$ 824
|
$ 757
|
$ 665
|
$ 499
|
$ 380
|
|
Net Income (Loss)
|
$(5,198)
|
$ (773)
|
$(1,272)
|
$(1,216)
|
$ 828
|
|
Current Assets
|
$ 3,606
|
$ 4,550
|
$ 3,902
|
$ 3,567
|
$ 3,205
|
|
Total Assets
|
$21,801
|
$25,939
|
$24,720
|
$23,605
|
$21,931
|
|
Current Liabilities
|
$ 5,941
|
$ 6,157
|
$ 6,455
|
$ 6,403
|
$ 5,245
|
|
Long-Term Debt
|
$12,507
|
$11,040
|
$ 9,576
|
$ 7,781
|
$ 5,797
|
|
Total Liabilities
Retained Earnings (Deficit)
|
$27,320
$ (4,373)
|
$26,323
$ 844
|
$23,563
$ 1,639
|
$19,581
$ 2,930
|
$16,354
$ 4,176
|
|
Shareholders' Equity
Cash Flow Provided by Operations
|
$ (5,519)
$(1,123)
|
$ (384)
$ 142
|
$ 1,157
$ 225
|
$ 4,024
$ 236
|
$ 5,577
$ 2,898
|
|
Outstanding
|
139.8
|
123.5
|
123.4
|
123.2
|
123.0
|
|
Market Price per Share
|
$ 7.48
|
$ 11.81
|
$ 12.10
|
$ 29.26
|
$ 50.18
|
Common Shares
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 Parts a and b, discuss the most important factors that signaled the likelihood of bankruptcy of Delta Air Lines in 2005.