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

Altman's discriminant function is used to predict a company's likelihood of defaulting on their debt. The function takes into account various financial ratios, including liquidity, profitability, and leverage. The resulting score is used to categorize the firm as high, medium, or low risk.

In this case, the Z-score is calculated to be -0.985, which falls below the threshold for a low-risk firm (<1.8) and a medium-risk firm (between 1.8 and 3.0). Therefore, according to Altman's model, this firm should be considered a high default risk firm.

Suppose That the Financial Ratios of a Potential Borrowing Firm