A United Kingdom–based financial analyst considers a Z-score model in evaluating two publicly traded non-manufacturing companies as follows: 

Z-Score Model = 1.2 × A + 1.4 × B + 3.3 × C + 0.6 × D + 0.999 × E, where

A is Working Capital/Total Assets

B is Retained Earnings/Total Assets

C is EBIT/Total Assets

D is Market Value of Equity/Total Liabilities

E is Sales/Total Assets

Firms with a Z-score greater than 3.0 are considered financially sound, those scoring between 3.0 and 1.8 are at greater risk of financial distress, and those with a Z-score below 1.8 are likely to face insolvency.

Calculate the Z-score for Firm 1 and Firm 2. Which has a higher likelihood of financial distress based on this measure?

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Financial Data (GBP thousands)/Firm Total Sales EBIT Current Assets Total Assets Current Liabilities Total Liabilities Retained Earnings Market Value of Equity Firm 1 23,110 6,910 7,560 36,360 5,400 9,970 20,890 29,000 Firm 2 15,270 2,350 4,990 23,998 3,564 10,050 13,787 18,270