Equity Research Assignment

15.535 Assignment 1 Han,Xinli

Question 1:

Z-Score = 1.2*(NWC/TA) + 1.4*(RE/TA) + 3.3*(EBIT/TA) + 0.6*(MVE/BVL) + 1.0*(Sales/TA)

= 1.2*((current assets – current liabilities)/TA) + 1.4*(RE/TA) + 3.3*(EBIT/TA as of year end) + 0.6*(Market value of equity/book value of liabilities) + 1.0*(Sales/TA as of year end)

=1.2*((8.78 – 9.06)/41.26) + 1.4*(-325.73/41.26) + 3.3*(-16.13/41.26) + 0.6*(44/0.105+0.47+1.62+10.67) + 1.0*(89.89/41.26)

=-0.008+(-11.05)+(-1.29)+2.05+2.18

= -8.118

Z”-Score = 6.56*(NWC/TA) + 3.26*(RE/TA) + 6.72*(EBIT/TA) + 1.05*(BVE/BVL)

= 6.56*((8.78 – 9.06)/41.26) + 3.26*(-325.73/41.26) + 6.72*(-16.13/41.26) + 1.05*(17.85/0.105+0.47+1.62+10.67)

= -0.044+(-25.74)+(-2.63)+1.46

= -26.95

According to the scoring criteria for Z-score and Z”-score, Cosi score has been well below 1.8, which indicates that it has a high probability of bankruptcy. Cosi’s negative EBIT figure and its negative retained earnings have contributed towards the results.

Question 2:

In my opinion, I think there are several factor that contributes to this happening.

Net Working Capital: Firstly, Cosi’s net working capital in 2002 is still positive compare to that of 2015. A positive net working capital indicates that the business has a certain degree of short-term liquidity and that the short-term funds available from its current assets are sufficient to cover