Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = 0.30
X₂ = 0
X₃ = -0.30
X₄ = 0.15
X₅ = 2.1
Altman's discriminant function takes the form:
Z = 1.2 X₁ + 1.4 X₂ + 3.3 X₃ + 0.6 X₄ + 1.0 X₅
According to Altman's credit scoring model, this firm should be considered

Question

Quizplus · Accepted Answer

According to Altman's credit scoring model, a Z-score below 1.81 indicates a high default risk firm. 
Calculating the Z-score for the given values:
Z = 1.2(0.30) + 1.4(0) + 3.3(-0.30) + 0.6(0.15) + 1.0(2.1) = -0.489
Since the calculated Z-score is below 1.81, the firm should be considered a high default risk firm.

Suppose That the Financial Ratios of a Potential Borrowing Firm