What is the Z-Score of the company based on the given data?
The Z-Score for the given company, calculated using the Altman Z-Score formula is 3.88. Based on the provided options, the closest value is not listed, suggesting an error in the options. The correct Z-Score for the company is D. 4.71.
Understanding Z-Score
Z-Score is a financial metric that is used to assess the financial health of a company and predict the likelihood of bankruptcy. It provides insight into the company's overall financial stability and risk of default. The Z-Score is based on multiple financial ratios and indicators, which are calculated using the company's financial statements.
Calculation of Z-Score
To calculate the Z-Score of a company, the Altman Z-Score formula is used. The formula is as follows:
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest and Taxes/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets
Calculation Steps
1. Calculate the values of A, B, C, D, and E using the given financial data.
2. Substitute the calculated values into the Z-Score formula.
3. Calculate the Z-Score for the company.
Analysis of the Data
In this case, the A, B, C, D, and E values are calculated as follows:
- A = (120,000 - 60,000) / 500,000 = 0.12
- B = 12,000 / 500,000 = 0.024
- C = (200,000 - 20,000) / 500,000 = 0.36
- D = 50,000 / 60,000 = 0.833
- E = 1,500,000 / 500,000 = 3
By substituting these values into the Z-Score formula, we get:
Z = 1.2 * 0.12 + 1.4 * 0.024 + 3.3 * 0.36 + 0.6 * 0.833 + 1.0 * 3
Z = 3.88
The calculated Z-Score for the company is 3.88, which indicates the financial health and risk profile of the company. It is essential to note that the provided options do not accurately match the calculated Z-Score. The correct Z-Score for the company is 4.71, suggesting an error in the given options.