U.S. Composite Corporation is attempting to increase its line of credit with First National State Bank. The director of credit management of First National State Bank uses the Z-score model to determine creditworthiness. U.S. Composite Corporation is not an actively traded firm and market prices are not always very reliable, so the revised Z-score model can be used.

The balance sheet and income statement of U.S. Composite Corporation for 2022 are in Tables 2.1 and 2.2.

The first step is to determine the value of each of the financial statement variables and apply them in the revised Z-score model:

Tables 2.1

Tables 2.2

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Net working capital Total assets Accumulated retained earnings Total assets EBIT Total assets Book value of equity Total liabilities The next step is to calculate the revised Z-score: (in millions) = = = $271 $1,879 $390 $1,879 $159 $1,879 $805 $1,074 = = .144 .208 .085 .750 Z = 6.56 x .144 +3.26 x 208 + 1.05 x .085 +6.72 x .750 = 6.75 Finally, we determine that the Z-score is above 2.9, and we conclude that U.S. Composite is a good credit risk.