How Does Altman 's Z Score Formula Work And How Can We Make Predictions Using This Formula?

• Provide at least two examples or problem situations in which statistics was used or could be used.

Slide 15: Here’s the same curve demonstrating the z-score values for 2.5% at each tail.

Table no 8 shows the credit rating, Image rating and the Investor confidence index. The credit rating of the company has been ranging from B+ to A+. The best in industry score is 20 while the overall credit rating is 20.The image rating is 59 with best in industry and overall rating being 20. The investor confidence index is fair as compared to competitors A and C who have an excellent rating.

For children: the BMD is given as a Z score. It compares to the normal range for children of the same age. The Z score curves resembles growth chart curves. A Z score of 0 is similar to the middle line, a Z score of +2 is similar to the highest line and a Z score of -2 is similar to the lowest line. Z scores do not take into account the child’s height or body size.

G. Times-Interest-Earned Ratio: This ratio measures how capable Company G is to pay debt. An increment (31.12-35.17) puts Company G above industry quartile of 29.7/17.2/8.1. Times-Interest-Earned Ratio represents strength for Company G.

1. Why is a z score a standard score? Why can standard scores be used to compare scores from different distributions? It is a scores relationship to the mean indicating whether it is above or below the mean. It does this by converting scores to z score. Yes – keep going – just a bit more is needed.2 out of 3 pts

Table 1. Ratios calculated from JBH Annual Report 2009 using formulae from Evans & McDowell (2009).

One is Working capital to total assets ratio that measures a firm’s ability to pay off its short-term liabilities and is calculated by subtracting current liabilities from current assets divided by total assets. The retained earnings to total assets ratio that measures a firm’s use of its total asset base to generate earnings is also used. It is important to note that retained earnings can be easily manipulated distorting the final calculation. The third financial ratio used by the Z score formula is the market value of equity to book value of debt. This is the inverse of the debt to equity ratio, and it shows the amount a firm’s assets can decline in value before liabilities exceed assets. For closely held firms, stockholders’ equity or total assets less total liabilities can be used but this amount has not been statistically verified for purposes of the formula. The sale to total assets ratio that measures a firm’s ability to generate sales with its asset base is also used. The fifth financial ratio is the operating income to total assets. This ratio is the most important factor in the formula because its profit that eventually makes or breaks a firm. In calculating the Z score, each of these ratios is given a weight factor that is used within the formula. (IOMA’s report, 2003). See appendix I for the Z score formula and how to interpret the results obtained. The Z score is used by firms when running regular financial data and firms use it to spot

. The higher the interest coverage ratio, the stronger the company financial strength, in 2016 second quarter Doller general was at 20.91 which mean Doller general strong financial future. Whereas debt to revenue ration work opposite, the lower its better. In 2016 second quarter Doller general was at 0.57, it's just the little more than 50% but I believe the serving other concept will still work. The Altman Z-score, when Z-score is greater than 2.99, it is in safe Zone "(gurufocus.com)". In 2016 second quarter Doller general has a Z=score of 4.91, which clearly indicate that the cooperation is safe

Government interest rates from Table B, 8.72%. The 10 year rate was chosen to be consistent with time lengths. Then the value for equity, debt and the firm need to be calculated, this is a simple step. The market price of the shares is multiplied by the number of outstanding shares to find the value of equity and the book value of long term debt is used for the value of debt and the value of both equity and debt are added together to come up with the value of the firm. The weight of the equity and debt can now be calculated by dividing the value of equity or debt by the value of the company. Lastly, the tax rate was calculated by using the balance sheet, given in exhibit 1, to determine income taxes paid and dividing it by earnings before interest and taxes for each of the last ten years then by taking the average of the ten years tax rates.

Suggested ratios to shoot for are found by putting them into the context of various industry figures. By using other firms as a yardstick, you can then assess where your values need to fall to be competitive with other firms similar to your own.

This executive summary will access the performance of Company X in the commercial automotive insurance sector for the given fiscal year. During that time, aggregate premiums totaled $33,908,374 while losses equaled $23,244,774. Yet, Company X was unprofitable, because the loss ratio for this fiscal period was roughly 69% and profitability for our company is defined as a loss ratio < 65%. That is to say, including fixed and variable expenses, the firm is $1,204,331 short of the break-even point. For that reason, changes in the rating algorithm are warranted if we are to be profitable in the future.

Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.

Ratings close to -100 indicate a large number of detractors to the organization, while scores close to +100 indicate a large number of active brand promoters. Any positive score is good, and generally, scores above +50 are considered excellent on the scale.

Since The Altman’s model widely used among the investors, though it is not an intuitive model, once a firm is predicted having a financial distress next year, it has been treated as it has been financial distress currently (whtaker, 1999).