Question

Here is some data from CV. DEF  during an accounting period.

Items	Amount
Total Asset Working Capital Operating Income (EBIT) Total Debts Retained Earning Sales Market Value of Shares Capital	90.000 10.000 13.000 140.000 36.000 99.000 40.000

Calculate the Altman Z-Score in predicting the potential bankruptcy of that firm. And give the explanation of that calculation result.

Answer 1

Answer:-

The Altman's Z Score can be calculated by the following formula:

Z = 1.2 (A) + 1.4 (B) + 3.3 (C) + 0.6 (D) + 1.0 (E)

Where, A = Working Capital / Total Assets

B = Retained Earnings / Total Assets

C = EBIT / Total Assets

D = Market Value of equity / Total Debts

E = Sales / Total Assets

Therefore, in this case Z = 1.2* (10/90) + 1.4*(36/90) + 3.3*(13/90) + 0.6*(40/140) + 1.0*(99/90)

= 0.133333333 + 0.606666666 + 0.476666665 + 0.171428572 + 1.1

= 2.488

Since in the grading scale 1.8 - 3 indicates that the company is likely to declare bankruptcy, in the given situation, the Altman's Z Score of 2.488 indicates that the company is likely to declare bankruptcy.

answered by: anonymous