How did the bankruptcy risk of circuit city change

Assignment Help Financial Accounting

Reference no: EM13901657

COMPUTING AND INTERPRETING BANKRUPTCY PREDICTION RATIOS. Exhibit 5.20 presents selected financial data for Best Buy and Circuit City for fiscal 2008 and 2007. Best Buy and Circuit City operate as specialty retailers offer- ing a wide range of consumer electronics, service contracts, product repairs, and home installation. Competition from Walmart, Costco, and Internet retailers has put downward pressure on prices and margins. In November 2008, Circuit City filed Chapter 7 bankruptcy. In the media, Circuit City's bankruptcy is largely blamed on its poor treatment of employees. In early 2007, Circuit City laid off 3,400 high-paid salespersons, or approximately 8 percent of its workforce, which left inexperienced, low-paid workers in charge of customer service. Customer service plummeted, which was especially harmful for the company that previously provided higher levels of customer satisfaction for their expensive electronic items, warranty products, and installation services.

Financial Data for Best Buy and Circuit City

(amounts in thousands except per share amounts) (Problem 5.17)

Best Buy Circuit City

Year-End 3/1 Year-End 2/28

	2008	2007	2008	2007
Sales	$40,023	$35,934	$11,744	$12,430
Net Income (Loss) before
Interest and Taxes	$ 2,290	$ 2,161	$ (352)	$ 22
Net Income (Loss)	$ 1,407	$ 1,377	$ (321)	$ (10)
Current Assets	$ 7,342	$ 9,081	$ 2,440	$ 2,884
Total Assets	$12,758	$13,570	$ 3,746	$ 4,007
Current Liabilities	$ 6,769	$ 6,301	$ 1,606	$ 1,714
Total Liabilities	$ 8,274	$ 7,369	$ 2,243	$ 2,216
Retained Earnings	$ 3,933	$ 5,507	$ 981	$ 1,336
Common Shares Outstanding	411	481	169	171
Market Price per Share	$ 42.00	$ 44.97	$ 4.38	$ 18.47

Required

a. Compute Altman's Z-score for Best Buy and Circuit City for 2007 and 2008.

b. How did the bankruptcy risk of Best Buy change between 2007 and 2008? Explain.

c. How did the bankruptcy risk of Circuit City change between 2007 and 2008? Explain.

d. As noted, Circuit City filed Chapter 7 bankruptcy in November 2008. Using the analysis from Parts b and c, would you have predicted Circuit City or Best Buy to file bankruptcy in 2008? Explain.

Reference no: EM13901657

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