Smart Products has a working capital to total assets ratio of 0.15,a retained earnings to total assets ratio of 0.2,an EBIT to total assets ratio of 0.4,a market value of equity to book value of equity ratio of 1.3,and a sales to total assets ratio of 0.75.What is Smart Products' Z-score?

Question

Quizplus · Accepted Answer

The Z-score formula is as follows:
Z-score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = EBIT / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets

Plugging in the values, we get:
Z-score = (1.2 x 0.15) + (1.4 x 0.2) + (3.3 x 0.4) + (0.6 x 1.3) + (1.0 x 0.75) = 3.31

Therefore, the best choice is B with a Z-score of 3.31.

Smart Products Has a Working Capital to Total Assets Ratio