Question: Using a modified discriminant function similar to Altmans, a bank estimates the following coefficients for its portfolio of loans. Z = 1.4X1 + 1.09X2 +

Using a modified discriminant function similar to Altmans, a bank estimates the following coefficients for its portfolio of loans.

Z = 1.4X1 + 1.09X2 + 1.5X3

where X1 = debt to asset ratio; X2 = profit margin and X3 = dividend payout ratio.

If the debt to asset ratio is 35 percent, profit margin is 13 percent, and the dividend payout ratio is 60 percent

  1. What is the Z-score ?
  2. Using Z=1.882 as the cut-off rate, what should be the debt to asset ratio of the firm in order for the bank to approve the loan?

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