Altman's model uses financial ratios to classify companies on the likelihood of entering bankruptcy in the...

 

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Altman's model uses financial ratios to classify companies on the likelihood of entering bankruptcy in the near future (that is, in the next fiscal year or two). Specific financial ratios are weighted and the product of the weights and ratio produces a score, referred to as a Z-score: Z-score = [1.2 x apital)] + [1.4 × Net Working Capital Total Assets + [3.3 x (To ts)] + [0.6 × (M² EBIT Total Assets/ + [0.999 × (Total Assets)] Sales X (Ret (Retained Earnings Total Assets Market Value of Equity Total Liabilities uty)] Altman found that companies with Z-scores above 3.0 are not likely to enter bankruptcy, and companies with Z-scores below 1.8 are likely to enter bankruptcy. The "gray area", in which it is difficult to predict bankruptcy, lies between 1.8 and 3.0. 1. Classify each of these ratios as asset management, profitability, liquidity, debt management, or market value ratios. Some won't fit neatly into a category. Briefly explain your reasoning for each classification. Altman's model uses financial ratios to classify companies on the likelihood of entering bankruptcy in the near future (that is, in the next fiscal year or two). Specific financial ratios are weighted and the product of the weights and ratio produces a score, referred to as a Z-score: Z-score = [1.2 x apital)] + [1.4 × Net Working Capital Total Assets + [3.3 x (To ts)] + [0.6 × (M² EBIT Total Assets/ + [0.999 × (Total Assets)] Sales X (Ret (Retained Earnings Total Assets Market Value of Equity Total Liabilities uty)] Altman found that companies with Z-scores above 3.0 are not likely to enter bankruptcy, and companies with Z-scores below 1.8 are likely to enter bankruptcy. The "gray area", in which it is difficult to predict bankruptcy, lies between 1.8 and 3.0. 1. Classify each of these ratios as asset management, profitability, liquidity, debt management, or market value ratios. Some won't fit neatly into a category. Briefly explain your reasoning for each classification.

Answer rating: 100% (QA)

SOL Classifying the Altman Zscore Ratios Asset Management Ratio Net Working CapitalTotal Assets Profitability Ratios EBITTotal Assets SalesTotal Assets Liquidity Ratio Market Value of EquityTotal Liab... View the full answer