From the following details, calculate the Altman Z-score: 

Total Assets - 40,000

Current Assets - 10,000

Current liabilities - 8,000

Long term debt - 4,000

Retained earnings - 1,000

Sales - 120,000

EBIT - 800

Market value of equity - 1200

Solution

The Altman Z-score is the output of a credit-strength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. The Altman Z-score is calculated 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 = earnings before interest and tax / total assets D = market value of equity / total liabilities E = sales / total assets A= (10,000-8,000)/40,000= 0.05 B = 1,000/40,000= 0.025 C = 800/40,000=0.02 D=1200/8000=0.15 E=120,000/40,000=3 Z Score = 1.2 x0.05 + 1.4 x0.025 + 3.3 x 0.02 + 0.6x 0.15 + 1.0 x 3 =3.251