Question

1.Explain the main differences between:

credit risk

liquidity risk

solvency risk

operational risk

2.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

Answer 1

1. The main differences between the following types of risks are as follows :-

a) credit risk is associated with the risk of default arising from the borrower failings to make the required payments

b) liquidity risk is related to not able to buying/selling of Investments at the appropriate price due to lack of marketability

C) solvency risk - solvency risk is related to the risk when an institution is not able to make the committeed payments back to the creditor even after dissolving all the assets.

d) operational risk is related to not able to running of a business efficiently and effectively due to human interference, natural disasters, changing multi dimensional environment, political factors etc

2. The z altman score calculated is 11.0972. The detailes calculation with formula is as follows :-

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