The following is ABC, Inc.'s, balance sheet (in thousands): (LG 20-5) Assets Liabilities Cash $ 20 Accounts receivable Inventory 288 Accounts payable $ 30 90 Notes payable 90 90 Accruals 30 Long-term debt 150 Plant and equipment 500 Equity 400 Total $700 Total $700 Also, sales equal $500, cost of goods sold equals $360, interest payments equal $62, taxes equal $56, and net income equals $22. The beginning retained earnings is $0, the market value of equity is equal to its book value, and the company pays no dividends.

a. Calculate Altman's Z-score for ABC, Inc., if ABC has a 50 percent dividend payout ratio and the market value of equity is equal to its book value. Recall the following: Net working capital = Current assets - Current liabilities Current assets Cash + Accounts receivable + Inventories Current liabilities = Accounts payable + Accruals + Notes payable EBIT Taxes Revenues - Cost of goods sold - Depreciation (EBIT -Interest) (Tax rate) Net income = EBIT - Interest - Taxes Retained eamings = Net income (1 - Dividend payout ratio)

b. Should you approve ABC Inc.'s application to your bank for $500,000 for a capital expansion loan?

c. If ABC's sales were $450,000, taxes were $16,000, and the market value of equity fell to one-quarter of its book value (assume cost of goods sold and interest are unchanged), how would that change ABC's income statement? If ABC's tax liability could be used to offset tax liabilities incurred by the other divisions of the firm, would your credit decision change?

d. What are some of the shortcomings of using a discrimi- nant function model to evaluate credit risk?