Chapter 2.4, Problem 6E

Altman’s z-score Altman’s z-score is a financial tool for predicting insolvency in a business.

For a certain company, the z-score formula is

$\mathrm{z}=0.84+0.6\mathrm{ }\times \mathrm{ }\frac{\mathrm{S}\mathrm{t}\mathrm{o}\mathrm{c}\mathrm{k}\mathrm{ }\mathrm{p}\mathrm{r}\mathrm{i}\mathrm{c}\mathrm{e}\mathrm{ }\times \mathrm{O}\mathrm{u}\mathrm{t}\mathrm{s}\mathrm{t}\mathrm{a}\mathrm{n}\mathrm{d}\mathrm{i}\mathrm{n}\mathrm{g}\mathrm{ }\mathrm{s}\mathrm{h}\mathrm{a}\mathrm{r}\mathrm{e}\mathrm{s}}{\mathrm{T}\mathrm{o}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{ }\mathrm{l}\mathrm{i}\mathrm{a}\mathrm{b}\mathrm{i}\mathrm{l}\mathrm{t}\mathrm{y}}$

In this exercise, we assume that thre are 45, 000 outstanding shares at a price of $4.80 each.

a. Use L, for total liability, in dollard, and give a formula for the z-score for this company.

b. Would a larger total liability idicate a better or worese outlook for the company?

c. A z-score of 1.81 or lower indicates a high probability of insolvency. What is the

smallest value of L that will give a z-score that indicates a high probability on insolvency?