Question

total assets are worth $3,500,000 while they have a working capital of $4,200,000. Their liabilities stand at $5,000,000 while retained earnings amount to $800,000. Earnings Before Interest and Tax come to $6,500,000. Sales total $8,300,000 while the market value of equity is $7,000,000.

Find Altman Z score , and explain the level of this score

Answer 1

The information given are as follows :-

total assets = $3,500,000

working capital = $4,200,000

liabilities = $5,000,000

retained earnings = $800,000

Earnings Before Interest and Tax = $6,500,000

Sales total = $8,300,000

market value of equity = $7,000,000

We can calculate the Altman Z score from the following formula :-

Altman Z Score = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E)

A = Working Capital / Total Assets = 42,00,000/35,00,000 = 1.2

B = Retained Earnings / Total Assets = 800,000 / 3500,000 = 0.229

C = Earnings Before Interest and Tax / Total Assets = 65,00,00,000 / 35,00,000 = 1.857

D = Market value of equity / Total Liabilities = 7,000,000 /  50,00,000 = 1.40

E = Sales / Total Assets = 83,00,000 / 35,00,000 = 2.371

= (1.2 x (4,200,000 / 3,500,000)) + (1.4 x (800,000 / 3,500,000)) + (3.3 x (6,500,000 / 3,500,000)) +(0.6 x (7,000,000 / 5,000,000)) + (0.999 x (8,300,000 / 3,500,000))

= (1.2 x 1.2) + (1.4 x 0.229) + (3.3 x 1.857) + (0.6 x 1.4) + (0.999 x 2.371)

= 1.44+0.3206+6.128+0.84+2.368

Altman Z-Score = 11.0966

…………Hope you are satisfied with the solution provided, kindly support me by rating the answer………....