Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.35, X₂ = Retained earnings/Total assets = 0.50, X₃ = Earnings before interest and taxes/Total assets = 0.60, X₄ = Market value of equity/Book value of long-term debt = 1.50, X₅ = Sales/Total assets ratio = 3.65. Calculate the Altman's Z-score for this firm. A) 7.65 B) 1.54 C) 6.60 D) 1.32

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, X5 = Sales/Total assets ratio. Substituting the given values: Z = 1.2(0.35) + 1.4(0.50) + 3.3(0.60) + 0.6(1.50) + 1.0(3.65) = 7.65.

Suppose That the Financial Ratios of a Potential Borrowing Firm