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    Question

    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
    A 4.68 Correct Answer Incorrect Answer
    B 2.30 Correct Answer Incorrect Answer
    C 3.67 Correct Answer Incorrect Answer
    D 3.25 Correct Answer Incorrect Answer
    E Cannot be determined Correct Answer Incorrect Answer

    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

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