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

Z = 1.2(0.30)+ 1.4(0.00)+ 3.3(0.20)+ 0.6(0.15)+ 1.0(2.1)
Z = 0.36 + 0.00 + 0.66 + 0.09 + 2.1 = 3.21.

Suppose That the Financial Ratios of a Potential Borrowing Firm