Question
MNO Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers
MNO Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars.
Assets Liabilities and Equity
Cash $ 30,000 Accounts payable $ 25,000
Accounts receivables 70,000 Notes payable 75,000
Inventory 110,000 Accruals 30,000
Long-term debt 250,000
Plant and equipment 390,000 Equity 220,000
Total assets $600,000 Total liabilities and equity $600,000
Also assume sales = $450,000; cost of goods sold = $310,000; and the market value of equity is equal to the book value. Also, retained earnings are $22,000.
Altmans discriminant function is given by:
a. What is the Altman discriminant function value for MNO Inc.? Recall that:
(X1) = Working capital/total assets ratio
(X2) = Retained earnings/total assets ratio
(X3) = Earnings before interest and taxes/total assets ratio
(X4) = Market value of equity/book value of long-term debt ratio
(X5) = Sales/total assets ratio
Net working capital = Current assets - Current liabilities.
Current assets = Cash + Accounts receivable + Inventories.
Current liabilities = Accounts payable + Accruals + Notes payable.
EBIT = Revenues cost of goods sold
b. Based on the Altmans Z-score only, should you approve MNO Inc.'s application to your bank for a $500,000 capital expansion loan?
c. If sales for MNO were $300,000, the market value of equity was only half of book value, and all other values are unchanged, would your credit decision change?
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