Question

please discuss Altman's Z-score Bankruptcy Prediction Model in a minimum of three sentences.

Answer 1

• Altman's Z-score BankruptcyPrediction model is a measurement that predicts the company's chances of bankcruptancy
• Altman's Z-score BankruptcyPrediction model combine five financial ratio to predict the chances of company's insolvency in next two years. Altman Z-score model formula is written as follows

Zeta = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where, A = Working capital / Total asset ratio

B = retained Earning / Total asset ratio

C = EBIT / Total asset ratio

D = Market value of equity / Total Liabilty Ratio

E = Total Sales / Total asset ratio

• Scores of Altman Z-Score Model

if score of company is below 1.8 then most probably that company could get bankrupt in next 2 year

if score of company is between 1.8 to 3.0 then the company is in grey zone but not certainly safe this company could get bankrupt if company having bad financial years but right now company is safe.

if score of company is More than 3.0 then that company is in safe zone