Question

Fair-to-Midland Manufacturing, Inc. (FMM), has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements:

Total assets	$105,000
EBIT	8,400
Net working capital	4,900
Book value of equity	34,000
Accumulated retained earnings	18,300
Sales	107,000

The stock price of FMM is $36 per share and there are 6,500 shares outstanding. What is the Z-score for this company?

*answer is NOT 1.04 or 1.0127. Thanks!!

Answer 1

Market Value of Equity = Share Price * Shares Outstanding

= $36 * 6,500 = $234,000

Liabilities = Assets - Owners' Equity = $105,000 - ($34,000 + $18,300)

= $105,000 - $52,300 = $52,700

​ζ = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

• Zeta (ζ) is the Altman’s Z-score
• A is the Working Capital/Total Assets ratio
• B is the Retained Earnings/Total Assets ratio
• C is the Earnings Before Interest and Tax/Total Assets ratio
• D is the Market Value of Equity/Total Liabilities ratio
• E is the Total Sales/Total Assets ratio

​ζ = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

= [1.2(4900/105000)] + [1.4(18300/105000)] + [3.3(8400/105000)] + [0.6(234000/52700)] + [1.0(10700/105000)]

= 0.056 + 0.244 + 0.264 + 2.6641 + 0.1019 = 3.33