Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.15, X₂ = Retained earnings/Total assets = 0.10, X₃ = Earnings before interest and taxes/Total assets = 0.15, X₄ = Market value of equity/Book value of long-term debt = 0.40, X₅ = Sales/Total assets ratio = 0.8. Calculate the Altman's Z-score for this firm. A) 9.10 B) 1.60 C) 0.371 D) 1.855

Question

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Altman's Z-score is calculated using the formula: Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1.0(X5), where X1 = Net working capital/Total assets, X2 = Retained earnings/Total assets, X3 = Earnings before interest and taxes/Total assets, X4 = Market value of equity/Book value of long-term debt, and X5 = Sales/Total assets ratio. Plugging in the given values: Z = 1.2(0.15) + 1.4(0.10) + 3.3(0.15) + 0.6(0.40) + 1.0(0.8) = 0.18 + 0.14 + 0.495 + 0.24 + 0.8 = 1.855.

Suppose That the Financial Ratios of a Potential Borrowing Firm