Company Variables Current assets Current liabilities Total assets Retained earni
ID: 2521664 • Letter: C
Question
Company Variables Current assets Current liabilities Total assets Retained earnings Earnings before interest and taxes Market price per share Number of shares outstanding Book value of total debt Sales $150,000 $170,000 $180,000 $60,000 50,000 30,000 $300,000 $280,000 $250,000 $80,000 90,000 60,000 $ 70,000 60,000 50,000 $ 20.00 18.75 16.50 9,000 9,000 9,000 s 30,000 s 50,000 s 80,000 $430,000 $400,000 $200,000 Required a. Compute the Z score for each company. b. According to the Altman model, which of these firms is most likely to experience financial failure?Explanation / Answer
Compute the Z score for each company
Ans
The formula for calculating Altman’s Z score is given below
Z = 1.2X1 +1.4X2+3.3X3+0.6X4+1.0X5
Where
X1 = Working capital / total assets
X2 = Retained earnings /total assets
X3 = EBIT(earnings before interest and taxes)/total assets
X4 = Market value of equity /book value of total liabilities
X5 = sales /total assets
First step calculate the working capital and market value of equity
Putting the data in tabular as below
company
variables
A
B
C
$
$
$
current assets
A
150000
170000
180000
current liabilities
B
60000
50000
30000
Working capital
C=A-B
90000
120000
150000
Total assets
300000
280000
250000
retained earnings
80000
90000
60000
earnings before interest and taxes
70000
60000
50000
market price per share
D
20
18.75
16.5
number of shares outstanding
E
9000
9000
9000
Market value of equity
F=D X E
180000
168750
148500
book value of total debt
30000
50000
80000
sales
430000
400000
200000
Second step calculation of various measures of all companies as below
calculation of various measures all the companies
A
B
C
measure
Amount
value
Amount
value
Amount
value
X1
numerator
Working capital
90000
0.30
120000
0.43
150000
0.60
denominator
total assets
300000
280000
250000
X2
numerator
Retained earnings
80000
0.27
90000
0.32
60000
0.24
denominator
total assets
300000
280000
250000
X3
numerator
earnings before interest and taxes
70000
0.23
60000
0.21
50000
0.20
denominator
total assets
300000
280000
250000
X4
numerator
Market value of equity
180000
6.00
168750
3.38
148500
1.86
denominator
book value of total liabilities
30000
50000
80000
X5
numerator
sales
430000
1.43
400000
1.43
200000
0.80
denominator
total assets
300000
280000
250000
Third step calculation of Z score of all companies as per above given formula
Z = 1.2X1 +1.4X2+3.3X3+0.6X4+1.0X5
Z SCORE CALCULATION
measure
factor
A
B
C
X1
1.2
0.36
0.51
0.72
X2
1.4
0.37
0.45
0.34
X3
3.3
0.77
0.71
0.66
X4
0.6
3.6
2.03
1.11
X5
1
1.43
1.43
0.80
Z score (total)
6.53
5.13
3.63
The Z score of companies is given below
B
As per Altman model following are the scores and its relevance to financial health of the enterprise
As per the scores all companies are in good health as their Z scores more than 2.99
company
variables
A
B
C
$
$
$
current assets
A
150000
170000
180000
current liabilities
B
60000
50000
30000
Working capital
C=A-B
90000
120000
150000
Total assets
300000
280000
250000
retained earnings
80000
90000
60000
earnings before interest and taxes
70000
60000
50000
market price per share
D
20
18.75
16.5
number of shares outstanding
E
9000
9000
9000
Market value of equity
F=D X E
180000
168750
148500
book value of total debt
30000
50000
80000
sales
430000
400000
200000
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