Arcket, Inc. is a publicly traded nonmanufacturing company. The following information is available from its financial statements: Net working capital $200,000
Retained earnings $125,000
Earnings before Interest and taxes $375,000
Market value of equity $1,015,000
Book value of total debt $1,750,000
Total assets $2,500,000
Sales $1,500,000
Calculate and interpret the Altman's Z-score for Arcket, Inc.
A) 1.6084; Bankrupt
B) 2.312; Zone of ignorance
C) 1.40816; Zone of ignorance
D) 2.9108; Non-bankrupt

Question

Quizplus · Accepted Answer

The Altman's Z-score is calculated using the formula: Z = 1.2*(Working Capital/Total Assets) + 1.4*(Retained Earnings/Total Assets) + 3.3*(EBIT/Total Assets) + 0.6*(Market Value of Equity/Book Value of Total Debt) + 1.0*(Sales/Total Assets). Plugging in the values, Z = 1.2*(200,000/2,500,000) + 1.4*(125,000/2,500,000) + 3.3*(375,000/2,500,000) + 0.6*(1,015,000/1,750,000) + 1.0*(1,500,000/2,500,000) = 2.312, which falls in the zone of ignorance.