Please show work and how to arrived at your conclusion. The assignment may be su
ID: 2717122 • Letter: P
Question
Please show work and how to arrived at your conclusion.
The assignment may be submitted as an Excel spreadsheet or an electronic (Word or PDF) document.
Please show work and how to arrived at your conclusion.
The assignment may be submitted as an Excel spreadsheet or an electronic (Word or PDF) document.
1. Company XYZ’s balance sheet is shown below (in thousands). XYZ's income sheet values are as follows (in thousands): Sales = $475, operating costs = $320, Interest expense = $27, and taxes = $56. The beginning retained earnings balance is zero, the market value of equity is equal to its book value, and the company has a dividend payout ratio of 50%. Assets Liabilities Cash 20 Accounts payable 30 Accounts receivables 90 Notes payable 90 Inventory 90 Accurals 30 Long Term debt 150 Plant and Equipments 500 Equity 400 Totals 700 Totals 700 a) Calculate the Altman's Z-score for this company. b) Should you approve XYZ's application to your bank for a capital expenditure loan? c) Assume XYZ's sales decreased to 395,000, taxes were 46,000 and the market value of equity fell to one-half of its book value (assume COGS and interest expense are unchanged). What is XYZ's Z-score? Does your credit decision change?Explanation / Answer
a) The output of a credit strength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy. The Altman Z-score is based on five financial ratios that can be calculated from data found on a company's annual 10K report.
Z-score = 1.2A + 1.4 B + 3.3 C + 0.6 D + 1.0 E,
where A = Working capital/ Total assets, B= Retained Earnings / Total Assets, C = Earnings before Interest and Tax/ Total Assets, D = Market value of equity/Total Liabilities and E = Sales/ Total Assets
Calculation of Retained Earnings:
A= Working capital/ total assets= 50/700=0.071
B = Retained earnings/ total assets =72/700 =0.103
C= EBIT/ total assets= 155/700 = 0.221
D= MV of equity/ Total liabilities= 400/700= 0.571
E= Sales/ total assets= 475/700= 0.679
The Altman Z-score accordingly works out to 1.98.
b) As the score is above 1.8, the company is not heading for bankruptcy,i.e, the firm is creditworthy. Hence, capital expenditure loan may be approved.
c) If sales drop to 395, EBIT drops to 75, and retained earnings to 2. The Altman Z- score now plummets to 1.35, indicating that the company is headed for bankruptcy. Hence it is not creditworthy anymore. No further loans to be approved for this company.
$ '000 Sales 475 Operating costs 320 Earnings before interest and tax (EBIT) 155 Interest expense 27 Earnings before tax 128 Tax expense 56 Retained earnings 72