Course Hero Logo

Adailiya Corp. Risk Level.docx - Running Head: ADAILIYA...

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 3 out of 8 pages.

Running Head: ADAILIYA CORP. RISK LEVEL1Adailiya Corp. Risk LevelYour NameName of UniversityCourse Number. Course TitleInstructor NameMarch 8, 2022
ADAILIYA CORP. RISK LEVEL1Adailiya Corp. Risk LevelFirms are established with a sole purpose of generating returns that maximize shareholderwealth. However, the process of wealth maximization is characterized by numerous risks, such asstrategic risks, financial risks, reputation risk, and compliance risks. These risks have adverseimpact to the business, with a worst case of being declared bankrupt and dissolution of a firm.Since the risks are different and use different parameters, one risk does not indicate theoccurrence of another, which make it challenging to measure the total impact of all the risks.Altman’s Z-score model is, however, used to measure the risk level of a company by combiningvarying parameters that affect the profitability, leverage, liquidity, and solvency of a company.Ideally, the model is used to measure the likelihood of a company to go bankrupt by determiningfinancial distress that a company is experiencing. It measures the likelihood within a timeline of2 years.The model features different ratios, namely, leverage, profitability, liquidity, solvency,and activity, which are the determinant of the type and level of risk that a firm is going through.The model is denoted by AZ-Score, and defined as Z-score = 1.2X1+ 1.4X2+ 3.3X3+ 0.6X4+X5. Where; X1= Working Capital / Total Assets, X2= Retained Earnings / Total Assets, X3=Earnings Before Interest and Taxes / Total Assets, X4= Book Value of Equity / Total Liabilities,X5= Sales / Total Assets. Furthermore, the resultant value of the model is grouped in three mainregions, namely, safe zone, grey zone, and red zone. On the safe zone (green zone), the Z-score isgreater the 2.99 and indicates that a company has a strong financial position. On the other hand,the grey zone is a zone of moderate probability of a firm becoming bankrupt. The region calls forstrategic decisions that would ensure the continuity of the firm. Z-score for the grey zone rangefrom 1.81 to 2.99. Lastly, the red zone is a zone that indicates financial distress in which a

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 8 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Fall
Professor
NoProfessor
Tags
Balance Sheet, Generally Accepted Accounting Principles, ADAILIYA CORP

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture