Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.30, X₂ = Retained earnings/Total assets = 0.40, X₃ = Earnings before interest and taxes/Total assets = 0.43, X₄ = Market value of equity/Book value of long-term debt = 0.65, X₅ = Sales/Total assets ratio = 0.95. Calculate the Altman's Z-score for this firm. A) 3.679 B) 2.73 C) 10.23 D) 2.046

Question

Quizplus · Accepted Answer

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, X5 = Sales/Total assets ratio. Substituting the given values: Z = 1.2(0.30) + 1.4(0.40) + 3.3(0.43) + 0.6(0.65) + 1.0(0.95) = 3.679.

Suppose That the Financial Ratios of a Potential Borrowing Firm