Question

"Which of the following companies have high bankruptcy risk?

1. Comapny A has an Altman's Z-score of 3.5
2. Company B has an Altman's Z-score of 1.2
3. Comapny C has an Altman's Z-score of 5.3"

Answer 1

Company B, with an Altman's Z-score of 1.2, is the one with a high bankruptcy risk. Scores below 1.8 indicate a likelihood of bankruptcy, while scores above 3 suggest financial stability.

Step-by-step explanation:

The Altman Z-score is a formula for determining the likelihood of a business going bankrupt. According to the Altman Z-score, a score below 1.8 suggests a company is likely to face bankruptcy, while a score above 3 indicates that a company is on solid financial footing. Therefore, among the given choices, Company B, with an Altman's Z-score of 1.2, has a high bankruptcy risk. In contrast, Company A with a score of 3.5 and Company C with a score of 5.3 are considered financially stable and low risk for bankruptcy.

To provide a real-world context, Lehman Brothers is an example of a major investment banking firm that went bankrupt in 2008, which was a significant event that signaled the beginning of a major economic crisis.