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Explain What Each Ratio in the Altman Credit Model Measures

question 45

Essay

Explain what each ratio in the Altman credit model measures and explain why higher values of each of the variables predict lower default probability.


Definitions:

Consolidated Income Statement

A consolidated income statement presents the financial performance of a parent company and its subsidiaries as one combined entity.

Forward Exchange Contract

A financial agreement between parties to exchange currencies at a predetermined future date and rate.

Annual Interest Rate

The percentage of interest that will be earned or paid on investments or loans over a one-year period.

Foreign Currency Option

A financial contract which grants the owner the option, without being obliged, to convert funds in one currency to another at a set exchange rate on a determined date.

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