Ask Question
20 July, 05:04

Suppose that the financial ratios of a potential borrowing firm take the following values: Working capital/Total assets ratio (X1) = 0.75 Retained earnings/Total assets ratio (X2) = 0.10 Earnings before interest and taxes/Total assets ratio (X3) = 0.05 Market value of equity/Book value of long-term debt =.60, X5 = Sales/Total assets ratio = 0.9. Calculate the Altman's Z-score for this firm. Round your answer to 3 decimal places.

+2
Answers (1)
  1. 20 July, 05:10
    0
    Z-score = 2.465

    Explanation:

    X1 = 0.75

    X2 = 0.10

    X3 = 0.05

    X4 = 0.60

    X5 = 0.9

    Z-score is calculated using the formula;

    Z-Score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

    Where:

    X1 = Working Capital/Total Assets

    X2 = Retained Earnings/Total Assets

    X3 = Earnings Before Interest & Tax/Total Assets

    X4 = Market Value of Equity/Total Liabilities

    X5 = Sales/Total Assets

    Substituting into the formula, we have;

    Z-Score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

    = 1.2*0.75 + 1.4*0.10 + 3.3*0.05 + 0.6*0.6 + 1.0*0.9

    = 0.9 + 0.14 + 0.165 + 0.36 + 0.9

    = 2.465
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Suppose that the financial ratios of a potential borrowing firm take the following values: Working capital/Total assets ratio (X1) = 0.75 ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers