Altman’s discriminant function takes the form:
Z = 1.2 Working capital/Total assets + 1.4 Retained earnings/Total assets + 3.3 EBIT/Total assets + 0.6 Market value of equity/Book value of total liabilities + 1.0 Sales/Total assets
How would you interpret a Z-score of 2.25?

Question

Altman’s discriminant function takes the form: 
 Z = 1.2 Working capital/Total assets + 1.4 Retained earnings/Total assets + 3.3 EBIT/Total assets + 0.6 Market value of equity/Book value of total liabilities + 1.0 Sales/Total assets 
 How would you interpret a Z-score of 2.25?

Answer

The Z-score lies within the 'safe' zone and thus a loan should be granted.

Answer

The interpretation of the Z-score is always dependent on a loan manager's subjective opinion.

Answer

The Z-score lies within the 'high default' zone and thus a loan should not be granted.

Answer

The Z-score lies within the 'zone of ignorance' and thus the borrower may or may not default.

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Altman’s discriminant function takes the form: Z = 1.2 Working capital/Total a...

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