a$)$ You are a Credit Manager in a large banking institution. Your main responsibility is to assess the credit worthiness of companies in the manufacturing sector. Your group has just developed the following model to compute the credit score of public companies in the manufacturing sector, where higher credit score indicates better credit worthiness:

Credit Score $=-{1\mathrm{.}5}^{**}$ Debt $\frac{?}{?}$ Total Assets

$+{0\mathrm{.}8}^{**}$ Net Income $\frac{?}{?}$ Total Assets

$-{0\mathrm{.}5}^{**}$ Cash Flows $\frac{?}{?}$ Total Assets

$+0\mathrm{.}75*$ Sales $\frac{?}{?}$ Total Assets

$-{2\mathrm{.}5}^{**}$ Total Liabilities $\frac{?}{?}$ Total Assets

$+0\mathrm{.}8**$ Net Income $/$ Total Assets

$-{0\mathrm{.}5}^{**}$ Cash Flows $/$ Total Assets

$+0\mathrm{.}75**$ Sales $/$ Total Assets

$2\mathrm{.}5*$ Total Liabilities $/$ Total Assets

The model has been developed using a large dataset of companies. What is your opinion about the ability of the specific model to provide accurate credit evaluations?

$[25$ marks$]$

b$)$ The distance to default model can be used to evaluate the credit worthiness of private companies. Do you agree? Explain.

$[10$ marks$]$