Predicting a Firm’s Financial Distress: The Merrill Lynch Co.

Richard Hamilton
Mike Rakes
Brandon Sather
Teresa Sexton

Narrative:
Merrill Lynch is financing the business through Cash provided by financing activities – the operating activities loss is offset by increases in long-term borrowings.

1. Evaluate the cash position at year-end
Report Date 12/28/2007 12/29/2006 12/30/2005
Cash & cash equivalents 41,346,000 32,109,000 14,586,000 The cash position of the firm increased by 120% in 2006 and 29% in 2007, giving the impression the firm was well capitalized. Further analysis of the cash-flow statement will prove this level of cash was not enough to support the massive losses (write-downs) …show more content…

This inflows of cash from financing is growing year-to-year are a significant rate.

Proceeds from (payments for) - issuance & resale of long-term borrowings 165,107,000 87,814,000 49,703,000

The balance sheet implication of this new debt is remarkable. There is a 43% increase in long term borrowings from 2006 to 2007.

Long-Term Borrowings from Balance Sheet 12/28/2007 12/29/2006
Total long-term borrowings 260,973,000 181,400,000

It looks like the firm used the majority of this borrowed cash to pay off their existing debt in the market. It may be that with the downturn in the market they could issue new debt at lower rates, thus paying off their high rate debt is a prudent business decision.

Report Date 12/28/2007 12/29/2006 12/30/2005
Proceeds from (payments for) - settlement & repurchase of long-term borrowings (93,258,000) (42,545,000) (31,195,000)

This is all well and good, except that with the issuing of new debt, the firm has significantly increased their total debt to equity ratio which is a red flag for long term insolvency.

Debt Management 12/28/2007 12/29/2006 12/30/2005
Total Debt to Equity 8.42 4.74 3.81

The firm is issuing long-term debt, albeit successfully, in a situation where they can’t show that they will continue operations in the short-term. Not only is debt mounting, but the company is becoming increasing