Bankruptcy

Bankruptcy

Student’s Name

University Affiliation

Bankruptcy

Use the Internet to locate four different recent bankruptcy filings from publicly traded corporations. Then, use the Internet to locate information on Altman’s Z-Score. Propose two steps that a company could take in order to avoid bankruptcy. Provide a rationale for your proposals.

The first step would be ensuring that the organization has a well-balanced cash flow at all time or that they are able to always achieve cash flow equilibrium. This means that the management must make sure that the cash inflows balance the cash outflows and in case of unstable economic conditions, they must make sure that they are able to adjust various financial factors to retain this equilibrium. For example cutting costs where necessary. This helps to ensure that an organization is able to meet their needs at any given time. The second step is ensuring that they always have updated budgets and business plans. This is important since these documents guide decision making and can be used to ensure that the revenues of a business and the expenses remain at equilibrium always.

Analyse the components of Altman’s Z-Score. Suggest at least two decisive measures that a company could take in order to lower its probability of bankruptcy.

Altman’s Z-Score has five components which are performance ratios as shown in the formula below.

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E (Damodaran, 2011).

Where:

A = working capital / total assets

B = retained earnings / total assets

C = EBIT / total assets

D = Market value of equity / total liabilities

E = sales / total assets

For each of these ratios, the lower the value obtained, the more probable an organization is to suffer bankruptcy. The company can, therefore, lower the probability of bankruptcy by maintaining healthy performance ratios defined in the formula above. They can do this by ensuring that they embark on sales promotion activities to promote the level of sales and by ensuring that they have sustainable sources of revenue to ensure that they maintain a good working capital at any time.

References

Caouette, J., Altman, E. & Narayanan, P. (1998). Managing credit risk : the next great financial challenge. New York: Wiley.

Damodaran, A. (2011). Applied corporate finance. Hoboken, NJ: John Wiley & Sons.