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

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.