Bankruptcy Prediction Model (Altman) Altman (1968) had devised a Z-score formula for predicting bankruptcy where: Z=0.012X 1
Question:
Bankruptcy Prediction Model (Altman)
Altman (1968) had devised a Z-score formula for predicting bankruptcy where:
Z=0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5
X1 = (current assets-current liabilities) / total assets (in % points) Measure of liquid assets
X2 = retained earnings / total assets (in % points) Measure of profitability
X3 = earnings before interest and taxes / total assets (in % points) Measure of operating efficiency
X4 = market value of equity / total liabilities (in % points)
X5 = sales / total assets (in % points) Measure of total asset turnover
Z- Score Zones:
Z > 2.99 - "safe" zone
1.81 < z < 2.99 - "grey" zone
Z< 1.81 - "distress" zone
Requirements:
- Test Altman's Z- score for a firm of your choice (For example: JCP filed for bankruptcy in 2020) to test its prediction for bankruptcy.
- Use any database to download data for last 5 or 10 years in excel, quarterly or annual values, as you need sufficient number data points to be able to see the trend in Z-score values
- Use Altman Z score calculator.
- Review of your finding as a brief word document
Applied Regression Analysis and Other Multivariable Methods
ISBN: 978-1285051086
5th edition
Authors: David G. Kleinbaum, Lawrence L. Kupper, Azhar Nizam, Eli S. Rosenberg