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
Suppose X₃ = 0.2 instead of -0.30. According to Altman's credit scoring model, the firm would fall under which default risk classification?

Question

Quizplus · Accepted Answer

With the updated X₃ value, the Z-score is calculated as 1.2(0.30) + 1.4(0) + 3.3(0.2) + 0.6(0.15) + 1.0(2.1) = 3.045. According to Altman's model, a Z-score above 2.99 indicates a low default risk firm.

Suppose That the Financial Ratios of a Potential Borrowing Firm