10. The following is ABC Inc.'s balance sheet (in thousands): ( LG 21-5) Assets Liabilities and Equity Cash $ 20 Accounts payable $ 30 Accounts receivable 90 Notes payable 90 Inventory 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 + Accouts receviable + Inventories Current liabilities Accounts payable + Accruals + Notes payable EBIT = Revenues - Cost of goods sold - Depreciation Taxes = (EBIT - Interest) (Tax rate) Net income = EBIT Interest - Taxes Retained earnings = 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? With the new data, does your credit decision change? d. What are some of the shortcomings of using a discriminant function model to evaluate credit risk? 1. 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) = = > = = = = =