Question

When considering the results of an Altman Z-Score analysis a score of 3.85 would suggest? A)     The company is in financial distress and there is a high probability of bankruptcy in the short term future. B)     The company is exposed to some risk of bankruptcy. Assume Mattel’s statutory tax rate for 2016 is 37%. Mattel’s 2016 tax shield is: C)    The company is healthy and there is a low bankruptcy potential in the short-term. D)    The company is healthy and there is a low bankruptcy potential in both the short and long-term.

Answer 1

D) The company is healthy and there is a low bankruptcy potential in both the short and long-term.

Explanation:

The Altman Z-score is a method first published in 1968 by Edward I- Altman, it is a type of Z-score that is used to predict the probability that a company has to fall into bankrupcy, it is given by the next formula:

Altman Z Score formula = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E)

Financial ratio used Formula for the financial ratio

A Working capital / total assets

B Retained earnings / total assets

C Earnings before interest and task payment /total assets

D The equity’s market value / total assets

E Total sales / total assets

If after this score the results of the company is lower than 1.1 the company has a great risk of falling into bankrupcy, if the company has a score from 1.1 to 2.7 it´s a gray area in which it wont fall into bankrupcy in the short-term, but has potential danger in the mid and long term, a company with a 2.8 or higher score is safe and healthy in the short, mid, and long term.