Suppose That the Financial Ratios of a Potential Borrowing Firm

question 53

Multiple Choice

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.05, X₂ = Retained earnings/Total assets = 0.12, X₃ = Earnings before interest and taxes/Total assets = 0.17, X₄ = Market value of equity/Book value of long-term debt = 0.42, X₅ = Sales/Total assets ratio = 0.6. Calculate and interpret the Altman's Z-score for this firm.

• A) 1.64; High risk
• B) 1.64; Indeterminate
• C) 1.99; Low risk
• D) 2.79; Indeterminate

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Definitions:

Law of Supply

A fundamental principle of economics that states that, all else equal, an increase in price results in an increase in the quantity supplied, and vice versa.

Law of Demand

States that, all else being equal, as the price of a product decreases, the quantity demanded of the product will increase, and vice versa.

Rent Controls

Government-imposed limits on the amount landlords can charge for renting out a property, intended to make housing more affordable.

Rental Housing

Living accommodations for which occupants pay rent to use or occupy land, buildings, or other residential spaces.