In the Altman Z calculation one of the ratios was retained earnings/total assets. What is the impact on the numerical value of the ratio if
a) Accounts receivable are collected? Briefly explain.
b) The firm operates at a profit but cuts to zero its dividend? Briefly explain.
|A)||When accounts receivable are collected there is a decrease in Accounts receivable and|
|increase in Bank/Cash. Therefore, the net effect in the Asset side is NIL.|
|Also, this transaction does not affect Retained earnings.|
|Therefore, no change in the numberical value of the ratio.|
|B)||Dividend is usually paid from Retained earnings. So by paying no dividend, the retained earnings|
|Also when dividend is paid out, the bank account balance decreases.|
|Therefore, there is an increase in the ratio by not paying the dividend.|
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