Question
How likely is the Paper company to file bankruptcy in the next 12 months. Interpret the financial data and ratios? (as per the Z-score below)
How likely is the Paper company to file bankruptcy in the next 12 months. Interpret the financial data and ratios? (as per the Z-score below)
Z-score equation= 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Where:
X1 = Working Capital/Total Assets = 0.02 X2 = Retained Earnings/Total Assets = -0.58 X3 = Earnings Before Interest & Tax/Total Assets = -0.04 X4 = Market Value of Equity/Total Liabilities = -0.28 X5 = Sales/Total Assets = 1.77
Thus:
Z-score = 1.2(.02) + 1.4(-0.58) + 3.3(-0.04) + 0.6(-0.28) + 1.0(1.77)
Therefore, Paper company's Z-score = 0.68
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Interpretation of scores:
< 1.81 are in danger of failure (potential bankruptcy)
>= 3 financially sound
1.81-2.99 need further investigation (zone of ignorance)
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References
Platt, H. D. (2004). Failure prediction. InPrinciples of corporate renewal(2nd ed., pp. 75-120). University of Michigan Press. file:///C:/Users/shash/OneDrive/Desktop/TUW/DBA%20Courses/DBA%20708/Module%202/HarlanDPlatt_2004_3FailurePrediction_PrinciplesOfCorporate.pdf (pp. 90-92)
OpenTuition. (2017, January 20).ACCA P5 Predicting and Preventing Corporate Failure[Video]. Retrieved fromhttps://www.youtube.com/watch?v=HpslfTbEbho[11:48]
Young, A., & Wang, Y. (2010). Multirisk level examination of going concern modifications.Managerial Auditing Journal, 25(8), 765-791. file:///C:/Users/shash/Downloads/Multi-risk_level_examination_o.pdf (pp. 766)
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