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 = 0.30,X₂ = Retained earnings/Total assets = 0.40,X₃ = Earnings before interest and taxes/Total assets = 0.43,X₄ = Market value of equity/Book value of long-term debt = 0.65,X₅ = Sales/Total assets ratio = 0.95.Calculate the Altman's Z-score for this firm.

Question

Quizplus · Accepted Answer

Using the formula: Z-Score = 1.2*(X₁) + 1.4*(X₂) + 3.3*(X₃) + 0.6*(X₄) + 1.0*(X₅) = 1.2*(0.30) + 1.4*(0.40) + 3.3*(0.43) + 0.6*(0.65) + 1.0*(0.95) = 0.36 + 0.56 + 1.419 + 0.39 + 0.95 = 3.679 Therefore, the Altman's Z-score for this firm is 3.679. Option A is the correct answer.

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