Predicting a Firms Financial Distress Dissertation

Forecasting a Business Financial Distress: The Merrill Lynch Company.

Richard Hamilton

Mike Rakes

Brandon Sather

Teresa Sexton


Merrill Lynch is usually financing the business through Funds provided by auto financing activities – the working activities damage is counteract by raises in long-term borrowings.

1 ) Evaluate the cash position in year-end

Statement Date12/28/200712/29/200612/30/2005

Cash & funds equivalents41, 346, 00032, 109, 00014, 586, 000

The amount position in the firm elevated by 120% in 2006 and 29% in 2007, offering the impression the firm was well capitalized. Further analysis from the cash-flow declaration will demonstrate this standard of cash was not enough to aid the massive deficits (write-downs) sustained by the working side in the businesses. Yet , the firm cannot financing negative progress; losses via operating actions can't go over cash-flows by financing in the long-term.

2 . Measure the cash flow by Operations

An increased divergence between net income and cash coming from operations equates to low quality of accruals and high quality of accruals means high quality of earnings. With higher quality income, investors have higher assurance. The curve ratio improved from. 05 to. '07 from 2006 to 3 years ago. This indicates to financial affirmation users that the quality of the firm's accruals is lessening, which may be an indicator the fact that firm could have financial relax in future intervals.

Survey Date12/28/200712/29/200612/30/2005

Net earnings (loss)(7, 777, 000)7, 499, 0005, 116, 000

Divergence ratio (Net Income-Cash flow coming from operations/Average Total Assets)0. 070. 060. 05

As you can see, the curve ratio is definitely increasing, which indicates that the quality of the accruals is reducing. This undercuts investor self confidence, as the earnings are considered significantly less reliable.

The major reduction in CFO was due to " Various other changes in financial loans, notes, & mortgages held for sale, ” due to main write-down indebted instruments. In the 86. 9B in adjustments, 23. 2B of this was related to write-downs of the CDO's, or exposure to the US sub-prime mortgage marketplace. The CEO stated that he needs to have more write-downs at a later date periods; another indicator of future economic distress since operating money flows will still be negatively influenced, and these affects will be unpredictable in nature. Various other changes in loans, notes, & mortgages organised for sale(86, 894, 000)(47, 670, 000) Net cash flows via operating activities(72, 362, 000)(39, 414, 000)(25, 658, 000)

3. Measure the cash flow from Investing Activities:

Cash flow coming from investing also contains investment secureness returns and a mature company like this needs to be off-setting working outflows with at least some great inflows coming from investment activity. This costly example of how a firm can be acquiring loans and trading money, but are still earnings negative in operations -- which means they'd just have to maintain acquiring auto financing to offset the investments.

Loans, paperwork & mortgages held to get investment5, 113, 000(681, 000)(12, 977, 000) Net money flows by investing activities(7, 086, 000)(11, 008, 000)(3, 938, 000)

Overall, the company shows bad cash goes from investing activities, which will show the organization is still functioning as a mature firm, and continuing to purchase the business.

Proceeds from the sale of discontinued operations1, 250, 000--

The complete proceeds from discontinued operations happen to be positive in 2007. They are one-time incidents, and could reveal the business can be shedding property.

Maturities of available-for-sale securities13, 362, 00013, 222, 00025, 452, 000 Product sales of available-for-sale securities39, 327, 00016, 176, 00036, 574, 000 Buys of available-for-sale securities(58, 325, 000)(31, 357, 000)(51, 283, 000)

Based on the investing actions section of the money flow assertion it is very clear that the most significant outflow certainly is $58, 325 of purchases of accessible for sale...

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