Z Score

In: Miscellaneous

Submitted By blaine
Words 348
Pages 2
Z = 1.2X.sub.1 + 1.4X.sub.2 + 3.3X.sub.3 + 0.6X.sub.4 + 1.0X.sub.5 Where X.sub.1 = Working Capital/Total Assets. This measures liquid assets in relation to the firm's size. Altman, interestingly, mentions that the most widely used current and acid ratios were not as good predictors as this measure.
Where X.sub.2 = Retained Earnings/Total Assets. This is a measure of cumulative profitability that reflects the firm's age as well as earning power. Many studies have shown failure rates to be closely related to the age of the business.
Where X.sub.3 = Earnings Before Income Taxes/Total Assets. This is a measure of operating efficiency separated from any leverage effects. It recognizes operating earnings as a key to long-run viability.
Where X.sub.4 = Market Value of Equity/Book Value of Debt. This ratio adds a market dimension. Academic studies of stock markets suggest that security price changes may foreshadow upcoming problems.
Where X.sub.5 = Sales/Total Assets. This is a standard turnover measure. Unfortunately, it varies greatly from one industry to another.

We take the data from Yahoo Finance for year ended Dec 31, 2007
Sub 1 = Working Capital/Total Assets
Current Assets 60,430
Current Liabilities 70,338
Working Capital (9,908)
Total Assets 148,883
Sub 1 -6.65%

Sub 2 = Retained earnings/Total Assets
Retained earnings (39,392)
Sub 2 -26.46%

Sub 3 = Earnings Before Income Taxes/Total Assets
Earnings Before Income Taxes -6253
Sub 3 -4.20%

Sub 4 = Market value of Equity/Book Value of debt
Market Value of equity 11,040
Total Debt 44,603
Sub 4 0.25

Sub 5 = Sales / Total Assets
Sales 181122
Sub 5 1.22 Z-Score 0.78

GM Bankrupt Non bankrupt
Sub 1 -6.65% -6.10% 41.40%
Sub 2 -26.46% -62.60% 35.50%
Sub 3 -4.20% -31.80% 15.40%
Sub 4 25.00% 40.10%…...

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