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Unformatted text preview: 849 Part III Risk Predicting Corporate Bankruptcy: The Z-Score Model 1 Many potential lenders use credit scoring models to assess the creditworthiness of prospec- tive borrowers. The general idea is to fi nd factors that enable the lenders to discriminate be- tween good and bad credit risks. To put it more precisely, lenders want to identify attributes of the borrower that can be used to predict default or bankruptcy. Edward Altman has developed a model using fi nancial statement ratios and multiple discriminant analyses to predict bankruptcy for publicly traded manufacturing fi rms. The resultant model is of the form Z 3.3 EBIT __________ Total assets 1.2 New working capital _________________ Total assets 1.0 Sales __________ Total assets .6 Market value of equity ___________________ Book value of debt 1.4 Accumulated retained earnings __________________________ Total assets where Z is an index of bankruptcy....
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