Chapter 20 problem 10, page 622. The following is ABC, Inc.s, balance sheet (in thousands): (LG 20-5).

Chapter 20 problem 10, page 622.

ASSETS			LIABILITIES
Cash	$20	Accounts Payable	$30
Accounts Receivable	$90	Notes Payable	$90
Inventory	$90	Accruals	$30
		Long term debt	$150
Plant and Equipment	$500	Equity	$400
TOTAL	$700	TOPTAL	$700

Also, sales equal $500, cost of goods sold equals $360, interest payments equal $62, taxes equal $56, and net income equals $22. The beginning retained earnings is $0, the market value of equity is equal to its book value, and the company pays no dividends.

a. Calculate Altmans Z-score for ABC, Inc., if ABC has a 50 percent dividend payout ratio and the market value of equity is equal to its book value. Recall the following:

Net Working Capital = Current Assets Current Liabilities

Current Assets = Cash +Accounts receivable + Inventories

Current Liabilities = Accounts Payable + Accruals +Notes payable

EBIT = Revenues Cost of goods sold Depreciation

Taxes = (EBIT Interest) (Tax rate)

Net Income = EWBIT Interest taxes

Retained earnings = Net Income (1 Dividend payout ratio)

b. Should you approve ABC Inc.s application to your bank for $500,000 for a capital expansion loan?

c. If ABCs sales were $450,000, taxes were $16,000, and the market value of equity fell to one-quarter of its book value (assume cost of goods sold and interest are unchanged), how would that change ABCs income statement? If ABCs tax liability could be used to offset tax liabilities incurred by the other divisions of the firm, would your credit decision change?

d. What are some of the shortcomings of using a discriminant function model to evaluate credit risk?