Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.10, X2 = Retained earnings/Total assets = 0.20, X3 = Earnings before interest and taxes/Total assets = 0.22, X4 = Market value of equity/Book value of long-term debt = 0.60, X5 = Sales/Total assets ratio = 0.9.

Calculate and interpret the Altman’s Z score for this firm.

(LG 21-5)

AppendixLO1