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Business Analysis : Using Financial Statements

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Final Examination Chenyi Wei MACC 652- Analysis of Accounting Data Dr. Larry M. Prober Question 1 Discuss the credit analysis process. [ Healy, P., & Palepu, K. (2012). Business analysis valuation: Using financial statements (5e ed.). ] Credit analysis process is to evaluate the ability for paying the firm’s debts at the scheduled times. It can also evaluate the ability a company can honor its financing obligation. Credit analysis make the firm has a great understanding on the strength of cash flow thorough review the capital structure. The Credit Analysis Process is similar to equity security analysis. The five steps included in the credit analysis process are as follows: consider nature and purpose of the loan; consider type of…show more content…
(2012). Business analysis valuation: Using financial statements (5e ed.).] This model can give a actual probability on firm being bankruptcy finally, and it is the most intuitive way. Example One such model, the Altman Z-score model, weights five variables to compute a bankruptcy score. For public companies the model is as follows: Z=1.2(X1)+1.4(X2)+3.3(X3)+0.6(X4)+1.0(X5) Where X1= net working capital/total assets (measure of liquidity) X2= retained earnings/total assets (measure of cumulative profitability) X3 = EBIT/total assets (measure of return on assets) X4 = market value of equity/book value of total liabilities (measure of market leverage) X5 = sales/total assets (measure of sales generating potential of assets) The model predicts bankruptcy when Z < 1.81. The range between 1.81 and 2.67 is labeled the “ gray area.” In applying the Altman Z-score model, I calculate two companies as an example. The following table presents calculations for two companies, Apple Inc. and Nokia Co., at the end of 2014: Apple Inc. Dec31, 2014 Nokia Co. Dec31, 2014 Model Coefficient Rations Score Rations Score X1 1.2 0.022 0.026 0.306 0.367 X2 1.4 0.376 0.526 0.224 0.313 X3 3.3 0.231 0.761 -0.011 -0.037 X4 0.6 5.346 3.208 2.364 1.419 X5 1.0 0.788 0.788 0.604 0.604 Altman Z-score 5.310 2.666 The table shows the wide performance gap between two of the largest and best-known competitors in mobile communication and media serving industry. Apple’s Z-score shows its
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