Question
You are a loan manager at Norm bank, you have the following loan application to review. The bank uses Altmans Z -score to assess the
You are a loan manager at Norm bank, you have the following loan application to review. The bank uses Altmans Z-score to assess the loan acceptability. An AA-rated, one-year business loan from a firm with the following financial statement information (in millions of dollars). Should the bank accept the loan?
Assets ($) |
| Liabilities and equity ($) |
|
Cash | 30 | Accounts payable | 50 |
Accounts receivables | 100 | Notes payable | 45 |
Inventory | 200 | Accruals | 50 |
|
| Long-term debt | 500 |
Plant and equipment | 1000 | Equity (retained earnings =$200) | 685 |
Total assets | 1330 | Total liabilities and equity | 1330 |
Also assume sales = $1250m, cost of goods sold = $930m and the market value of equity is equal to 2 times the book value of equity. Norm Bank uses the Altmans Z-score model to evaluate AA-rated loans.
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