The following is ABC Inc.s balance sheet (in thousands

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.

Calculate Altmans 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 + Accounts receivable + Inve ntories

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 ABCs 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 ABCs 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

Assets Cash Accounts receivable Inventory $ 20 90 90 Liabilities and Equity Accounts payable $ 30 Notes payable 90 Accruals Long-term debt 150 Equity 400 Total $700 30 Plant and equipment Total 500 $700