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:

Hypothesis

A proposed explanation for a phenomenon, made as a starting point for further investigation, based on limited evidence as a provisionary idea.

Quantitative

Pertaining to, assessing, or evaluated based on the amount of something rather than its excellence.

Active Interviewing

A dynamic and interactive form of interviewing where both the interviewer and interviewee actively participate and contribute to the flow of conversation and exchange of ideas.

Spurious Correlation

A statistical relationship between two variables that appears to be causally related but is actually due to a third variable or chance.