FSA Tutorial 8

Qs5.13: Calculating and Interpreting Risk Ratios.

Refer to the financial statement data for Hasbro in Problem 4.24 in Chapter 4. Exhibit 5.15 presents
risk ratios for Hasbron for Year 2 and Year 3.
REQUIRED
a. Calculate the amounts of these
ratios for Year 4.
b. Assess the changes in the short-
term liquidity risk of Hasbro between
Year 2 and Year 4 and the level of
that risk at the end of Year 4.
c. Assess the changes in the long-
term solvency risk of Hasbro between
Year 2 and Year 4 and the level of
that risk at the end of Year 4.

Qs5.15: Interpreting Risk Ratios. Refer to the profitability ratios of Coca-Cola in Problem 4.26 in
Chapter 4. Exhibit 5.17 presents
risk ratios for Coca-Cola for 2006–
2008. As we did within the chapter
for PepsiCo, we utilize Coca-Cola’s
footnote disclosures to extract the
amount of trade accounts payable
included within the line item
accounts payable and accrued
expenses.
REQUIRED
a. Assess the changes in the short-
term liquidity risk of Coca-Cola
between 2006 and 2008.
b. Assess the changes in the long-term solvency risk of Coca-Cola between 2006 and 2008.
c. Compare the short-term liquidity ratios of Coca-Cola with those of PepsiCo discussed in the chapter.
Which firm appears to have more short-term liquidity risk? Explain.
d. Compare the long-term solvency ratios of Coca-Cola with those of PepsiCo discussed in the chapter.
Which firm appears to have more long-term solvency risk? Explain.
Qs5.16: Computing and Interpreting Risk and Bankruptcy Prediction Ratios for a Firm That
Declared Bankruptcy.
Delta Air Lines, Inc., 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 Requirements a and b, respectively.
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 Requirements a and b, discuss the most important factors that signaled the
likelihood of bankruptcy of Delta Air Lines in 2005.