This is not the document you are looking for? Use the search form below to find more!

Report home > World & Business

Predicting Corporate Bankruptcy: The Z-Score Model1

0.00 (0 votes)
Document Description
Many potential lenders use credit scoring models to assess the creditworthiness of prospective 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. There sultant model is of the form EBIT
File Details
  • Added: October, 07th 2010
  • Reads: 412
  • Downloads: 3
  • File size: 113.08kb
  • Pages: 2
  • Tags: market value, equity, bankruptcy
  • content preview
Submitter
  • Name: matteo
Embed Code:

Add New Comment




Related Documents

PREDICTING FINANCIAL DISTRESS OF COMPANIES: REVISITING THE Z-SCORE ...

by: eliasz, 54 pages

This paper discusses two of the venerable models for assessing the distress of industrial corporations. These are the so-called Z-Score model (1968) and ZETA® 1977) credit risk model. Both ...

Z Score Calculator

by: ramsingh11, 6 pages

A z-score (aka, a standard score) indicates how many standard deviations an element is from the mean. A z-score can be calculated from the following formula. z = (X - μ) / σ where z is the ...

Z Score Chart

by: ramsingh11, 3 pages

Use this chart to find the area under a normal curve when finding An approximation for a binomial distribution. Negative z-score - value is to the left of the mean. Positive z-score - value is to the ...

Z Score Table

by: ramsingh11, 3 pages

Definition of the Standard Normal Distribution The Standard Normal distribution follows a normal distribution and has mean 0 and standard deviation 1 Notice that the distribution is perfectly ...

Deviation And Z Score Worksheet

by: tutorciecleteam, 4 pages

1. The mean test score of students is 80 and the standard is 10, the probability that a student gets? A. Between 60 C. Less than 60 B. And 85 in the testAnd > 85 in the test D. None 2. Calculate the ...

Corporate Finance: The Core, 2nd Edition, Jonathan Berk, Peter DeMarzo, PRENTICE HALL, IM+SM+TB

by: mysmandtb, 9 pages

Solution Manuals and Test Banks I have huge collection of solution manuals and test banks. I strive to provide you unbeatable prices with excellent support. So, I assure you that you won’t be ...

DogTown: The Legend of the Z-Boys by Glen E. Friedman

by: hatsuna, 2 pages

DogTown: The Legend of the Z-Boys by Glen E. Friedman A Hit At Christmas! In the early 1970s, the sport of skateboarding had so waned from its ...

Needle Park what can we learn from the Zürich experience.pdf

by: Ali, 5 pages

Needle Park what can we learn from the Zürich experience

Z-score calculator

by: tutorvistateam, 4 pages

To understand Least Common multiple we have to understand about multiple first. When we can get a number by multiplication of certain combinations of other numbers, the numbers multiplied are called ...

Pension Accounting and Corporate Earnings: The World According to GAAP

by: suzuka, 48 pages

This study's underlying premise is that current pension plan accounting has two important negative effects. First, it distorts the measurement of earnings and net worth in the short run, as well as ...

Content Preview
849
Part III Risk
Appendix 30A Predicting Corporate Bankruptcy:
The Z-Score Model1
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
EBIT
New working capital
Z 3.3

__________
_________________

1.2




Total assets
Total assets
Sales
Market value of equity
1.0

__________
___________________

.6




Total assets
Book value of debt
Accumulated retained earnings
1.4




__________________________
Total assets
where Z is an index of bankruptcy.
.com/rwj

A score of Z less than 2.675 indicates that a fi rm has a 95 percent chance of becoming
bankrupt within one year. However, Altman’s results show that in practice scores between
.mhhe
1.81 and 2.99 should be thought of as a gray area. In actual use, bankruptcy would be pre-
dicted if Z 1.81 and nonbankruptcy if Z 2.99. Altman shows that bankrupt fi rms and
nonbankrupt fi rms have very different fi nancial profi les one year before bankruptcy. These
different fi nancial profi ts are the key intuition behind the Z-score model and are depicted in
Table 30A.1.
visit us at www
Table 30A.1
Average Ratios One Year before
Financial Statement
Bankruptcy of
Ratios One Year
Bankrupt Firms
Nonbankrupt Firms
before Bankruptcy:
Net working capital
Manufacturing Firms




_________________

6.1%
41.4%
Total assets
Accumulated retained earnings





__________________________
62.6%
35.5%
Total assets
EBIT


__________

31.8%
15.4%
Total assets
Market value of equity




___________________

40.1%
247.7%
Total liabilities
Sales


______

150%
190%
Assets
SOURCE: Edward I. Altman, Corporate Financial Distress and Bankruptcy (New York: John Wiley & Sons,
1993),Table 3.1, p. 109.
1Edward I. Altman, Corporate Financial Distress and Bankruptcy (New York: John Wiley & Sons, 1993), Chapter 3.
ros05902_ch30(appendix).indd 849
ros05902_ch30(appendix).indd 849
6/21/06 12:28:04 PM
6/21/06 12:28:04 PM

Altman’s
original
Z-score model requires a fi rm to have publicly traded equity and be
a manufacturer. He uses a revised model to make it applicable for private fi rms and non-
manufacturers. The resulting model is this:
Net working capital
Accumulated retained earnings
Z 6.56

__________________________


________________
3.26





Total assets
Total assets
Book value of equity

EBIT
1.05

__________
_________________

6.72





Total assets
Total liabilities
where Z 1.23 indicates a bankruptcy prediction,
1.23 Z 2.90 indicates a gray area,
and Z 2.90 indicates no bankruptcy.
U.S. Composite Corporation is attempting to increase its line of credit with First National State
Bank. The director of credit management of First National State Bank uses the Z-score model to de-
termine creditworthiness. U.S. Composite Corporation is not a publicly traded fi rm, so the revised
Z-score model must be used.
EXAMPLE

The balance sheet and income statement of U.S. Composite Corporation are in Tables 2.1 and
2.2 (Chapter 2).

The fi rst step is to determine the value of each of the fi nancial statement variables and apply
them in the revised Z-score model:
.com/rwj
(in millions)
Net working capital
275




_________________



_____

0.146
.mhhe
Total assets
1,879
Accumulated retained earnings
390





__________________________


_____
0.208
Total assets

1,879
EBIT
219


__________



_____
0.117
Total assets

1,879
Book value of equity
805





_________________



____
1.369
Visit us at www
Total liabilities
588
The next step is to calculate the revised Z-score:
Z 6.56 0.146 3.26 0.208 1.05 0.117 6.72 1.369
10.96
Finally we determine that the Z-score is above 2.9, and we conclude that U.S. Composite is a good
credit risk.
ros05902_ch30(appendix).indd 850
ros05902_ch30(appendix).indd 850
6/21/06 12:28:05 PM
6/21/06 12:28:05 PM

Download
Predicting Corporate Bankruptcy: The Z-Score Model1

 

 

Your download will begin in a moment.
If it doesn't, click here to try again.

Share Predicting Corporate Bankruptcy: The Z-Score Model1 to:

Insert your wordpress URL:

example:

http://myblog.wordpress.com/
or
http://myblog.com/

Share Predicting Corporate Bankruptcy: The Z-Score Model1 as:

From:

To:

Share Predicting Corporate Bankruptcy: The Z-Score Model1.

Enter two words as shown below. If you cannot read the words, click the refresh icon.

loading

Share Predicting Corporate Bankruptcy: The Z-Score Model1 as:

Copy html code above and paste to your web page.

loading