Calculation of Altman's Z-Score: Suppose That the Financial Ratios of a Potential

question 24

Multiple Choice

Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.15,X₂ = Retained earnings/Total assets = 0.10,X₃ = Earnings before interest and taxes/Total assets = 0.15,X₄ = Market value of equity/Book value of long-term debt = 0.40,X₅ = Sales/Total assets ratio = 0.8.Calculate the Altman's Z-score for this firm.

• A)9.10
• B)1.60
• C)0.371
• D)1.855

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Definitions:

Diseconomies of Scale

A situation in which a firm experiences an increase in average costs due to an increase in its size or output level, often resulting from inefficiencies and higher per unit costs.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Demand Curves

Visual diagrams that illustrate the connection between a product's price and the amount consumers are willing to buy.

MC = MR

An economic principle that firms reach the optimal level of production when marginal cost equals marginal revenue.