ONLINE CHAPTER
PREDICTING INSOLVENCY
P22-3 Sosbee Foods has a working capital/total assets ratio of 0.2, a retained earnings/total assets ratio
of 0.1, an earnings before interest and taxes/total assets ratio of 0.25, a market value of equity/
book value of total liabilities ratio of 0.6 and a sales/total assets ratio of 0.8. Calculate and interpret
the company’s Z-score.P22-4 The following balance sheet and income statement are for Weber Industries. The company’s shares
are currently priced at $6 per share. Calculate and interpret the company’s Z-score.Weber Industries balance sheet as at 31 December 2017
Assets Liabilities and shareholders’ equity
Cash $ 400,000 Accounts payable $ 5,000,000
Accounts receivable 3,000,000 Notes payable – bank 1,000,000
Inventories 4,000,000 Total current liabilities $ 6,000,000
Total current assets $ 7,400,000 Mortgage $ 4,000,000
Land $ 1,000,000 Unsecured debt 6,000,000
Net plant 5,000,000 Total long-term debt $10,000,000
Net equipment 8,000,000 Preferred shares (100,000 shares) $ 1,000,000
Total fixed assets $14,000,000 Ordinary shares (500,000 shares) 1,000,000
Total $21,400,000 Paid-in capital in excess of par 2,000,000
Retained earnings 1,400,000
Total shareholders’ equity $ 5,400,000
Total $21,400,000Weber Industries income statement for the year ending 31 December 2017
Sales $6,000,000
Less: Cost of goods sold 3,500,000
Less: Selling and administrative expenses 1,000,000
Earnings before interest and taxes $1,500,000
Less: Interest 1,100,000
Earnings before taxes 400,000
Less: Taxes (30%) 120,000
Net income $ 280,000