MNO Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars.

Also assume sales = $500,000; cost of goods sold = $360,000; and the market value of equity is equal to the book value.

a. What is the Altman discriminant function value for MNO Inc.? Recall that:
Net working capital = Current assets – Current liabilities.
Current assets = Cash + Accounts receivable + Inventories.
Current liabilities = Accounts payable + Accruals + Notes payable.
EBIT = Revenues – Cost of goods sold.

b. Based on Altman’s Z score only, should you approve MNO Inc.’s application to your bank for a $500,000 capital expansion loan?

c. If sales for MNO were $250,000, the market value of equity was only half of book value, and all other values are unchanged, would your credit decision change?

d. Would the discriminant function change for firms in different industries?
Would the function be different for manufacturing firms in different geographic sections of the country? What are the implications for the use of these types of models by FIs?

Transcribed Image Text:

Assets Liabilities and Equity Cash $ 20 Accounts receivable Inventory 2880 Accounts payable $ 30 90 Notes payable 40 90 Accruals 30 Long-term debt 150 Plant and equipment 500 Equity (retained earnings = $300) 450 Total assets 700 Total liabilities and equity 700