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	$115,000
EBIT	8,900
Net working capital	5,400
Book value of equity	39,000
Accumulated retained earnings	18,800
Sales	112,000

   

The stock price of FMM is $41 per share and there are 7,000 shares outstanding. What is the Z-score for this company? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

Z-score is used to predict company's bankruptcy. It can be computed with following equation:

where,

A = working capital / total assets. Measures liquid assets in relation to the size of the company.

B = retained earnings / total assets. Measures profitability that reflects the company's age and earning power.

C = earnings before interest and taxes / total assets. Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability.

D = market value of equity / book value of total liabilities. Adds market dimension that can show up security price fluctuation as a possible red flag.

E = sales / total assets. Standard measure for total asset turnover (varies greatly from industry to industry).

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -