Assignment 5 bus 169 A - Ind Assignment 5 Reasoning...

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Ind. Assignment 5: Reasoning – Calculating and Interpreting a Z-Score Introduction The Altman Z-score, developed by Edward I. Altman in 1968 was created to determine a company’s financial health. The Z-score can predict both public companies and private companies’ risks of bankruptcy or financial distress. The higher the z-score, the lower the chance of having bankruptcy and vice versa. The formula to calculate the z-score = 1.2A+1.4B+3.3C+0.6D+1.0E. Each variables represent different business ratios that can be used to estimate the likelihood of financial distress. A.) Altman Z-Score The Altman Z-score is defined as “the output of a credit-strength test that gauges a publicly traded manufacturing company’s likelihood of bankruptcy” (Investopedia.com, n.d). There are five financial ratios that can be calculated through data from a company’s annual 10K report for the Altman Z-Score. Z-Score= 1.2A+1.4B+3.3C+0.6D+1.0E is the formula to calculate Altman Z-score. Variable A is working capital/total assets. The working capital is a measure of a company’s efficiency and its short-term financial health as calculated by subtracting current liabilities from current assets (investopedia.com, n.d.). The total assets are referring to the total amount of assets owned by a person or company (accountingtools.com, n.d). Variable B of the Altman Z-score is Retained Earnings/Total Assets. The retained earnings are “a corporation’s cumulative earnings since the corporation was formed minus the dividends” (accountingcoach.com, n.d). Variable C is Earnings Before Interest & Tax/Total Assets. The Earnings Before Interest & Tax or EBIT is an
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indicator of a company’s profitability and is calculated by revenue subtracting expenses excluding tax and interest (investopedia.com, n.d.). Variable D of Altman Z- score is Market Value of Equity/Total Liabilities. The Market Value of Equity is the “total dollar market value of all of a company’s outstanding shares” and is calculated by multiplying the company’s current stock price by its number of outstanding shares. Total liabilities are “the aggregate debt and financial obligations owed by a business to individuals and organizations at any specific period of time” (Grimsley S., n.d). Variable E is calculated by Sales/Total Assets. Sales are a transaction
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