Douglas C. Mather, founder, chair, and chief executive of Fly-by-Night International Group (FBN), lived the fast-paced, risk-seeking life that he tried to inject into his company. Flying the company’s Learjets, he logged 28 world speed records. Once he throttled a company plane to the top of Mount Everest in three and a half minutes. These activities seemed perfectly appropriate at the time. Mather was a Navy fighter pilot in Vietnam and then flew commercial airlines. In the mid-1970s, he started FBN as a pilot training school. With the defense buildup beginning in the early 1980s, Mather branched out into government contracting. He equipped the company’s Learjets with radar jammers and other sophisticated electronic devices to mimic enemy aircraft. He then contracted his “rent-an-enemy” fleet to the Navy and Air Force for use in fighter pilot training. The Pentagon liked the idea, and FBN’s revenues grew to $55 million in the fiscal year ending April 30, Year 14. Its common stock, issued to the public in Year 9 at $8.50 a share, reached a high of $16.50 in mid-Year 13. Mather and FBN received glowing write-ups in Business Week and Fortune.

Required

a. What evidence do you observe from analyzing the financial statements that might signal the cash flow problems experienced in mid-Year 14?

b. Can FBN avoid bankruptcy during Year 15? What changes in the design or implementation of FBN’s strategy would you recommend? To compute Altman’s Z-score, use the low-bid market price for the year to determine the market value of common shareholders’ equity.