Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = .25, X₂ = Retained earnings/Total assets = .30, X₃ = Earnings before interest and taxes/Total assets = .35, X₄ = Market value of equity/Book value of long-term debt = .50, X₅ = Sales/Total assets ratio = 0.9. Calculate the Altman's Z-score for this firm.

Question

Quizplus · Accepted Answer

Altman's Z-Score formula is Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5, where:
X1 = working capital/total assets = 0.25
X2 = retained earnings/total assets = 0.30
X3 = EBIT/total assets = 0.35
X4 = market value of equity/book value of long-term debt = 0.50
X5 = sales/total assets = 0.9

Plugging in the values, we get:
Z = 1.2(0.25) + 1.4(0.30) + 3.3(0.35) + 0.6(0.50) + 1.0(0.9) = 3.075
Therefore, the Altman's Z-score for this firm is 3.075, which falls into the safe zone (above 2.99). The best choice is B.

Calculation of Altman's Z-Score: Suppose That the Financial Ratios of a Potential