Suppose a firm has a Z score of 1.6,and the following financial characteristics: working capital to total assets ratio of 0.05,retained earnings to total assets ratio of 0.10,market value of equity to book value of equity ratio of 1.1,and sales to total assets ratio of 0.4.What must be its EBIT to total assets ratio?

Question

Quizplus · Accepted Answer

The Z score for a firm is calculated using the formula: Z = 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/book value of equity, and E = sales/total assets. Given A = 0.05, B = 0.10, D = 1.1, E = 0.4, and Z = 1.6, we can solve for C (EBIT/total assets). Plugging the values into the formula: 1.6 = 1.2(0.05) + 1.4(0.10) + 3.3C + 0.6(1.1) + 1.0(0.4). Solving for C gives C = 0.10.

Suppose a Firm Has a Z Score of 1