Question

Suppose that the financial ratios of a potential borrowing firm take the following values: Working capital/Total assets ratio (X1) = 0.75 Retained earnings/Total assets ratio (X2) = 0.10 Earnings before interest and taxes/Total assets ratio (X3) = 0.05 Market value of equity/Book value of long-term debt = .60, X5 = Sales/Total assets ratio = 0.9. Calculate the Altman’s Z-score for this firm. Round your answer to 3 decimal places.

Answer 1

Z-score = 2.465

Step-by-step explanation:

X1 = 0.75

X2 = 0.10

X3 = 0.05

X4 = 0.60

X5 = 0.9

Z-score is calculated using the formula;

Z-Score = 1.2X1+ 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

Where:

X1 = Working Capital/Total Assets

X2 = Retained Earnings/Total Assets

X3 = Earnings Before Interest & Tax/Total Assets

X4= Market Value of Equity/Total Liabilities

X5 = Sales/Total Assets

Substituting into the formula, we have;

Z-Score = 1.2X1+ 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

= 1.2*0.75+ 1.4*0.10 + 3.3*0.05 + 0.6*0.6 + 1.0*0.9

= 0.9 + 0.14 + 0.165 + 0.36 + 0.9

= 2.465