Question

Jon Fulkerson, a credit analyst at the True Credit bank, has received a credit application from Seether, LLC, a private company. An abbreviated portion of the financial information provided by the company is shown below:

Total assets $78,000

EBIT 8,600

Net working capital 3,900

Book value of equity 15,000

Accumulated retained earnings 26,000

Total liabilities 55,000

What is the Z-score for this company? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

Solution :

Here,

Formula for Z Score is

Z = 6.56 X1 + 3.26 X2 + 1.05 X3 + 6.72 X4

Where,

X1 = Net working capital / Total assets

X1 = 3,900 / 78,000

X1 = 0.0500

X2 = Accumulated retained earnings / Total assets

X2 = 26,000 / 78,000

X2 = 0.3333

X3 = EBIT / Total assets

X3 = 8,600 / 78,000

X3 = 0.1103

X4 = Book value of Equity / Total liabilities

X4 = 15,000 / 55,000

X4 = 0.2727

Therefore,

Z Score = 6.56 ( 0.0500 ) + 3,26 ( 0.3333 ) + 1.05 ( 0.1103 ) + 6.72 ( 0.2727 )

Z Score = 3.363