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Answer: Safe zone
## Explanation To calculate Altman's Z-score, we need to compute each component: **X₁ = Working Capital / Total Assets** = $170,000 / $670,000 = 0.2537 **X₂ = Retained Earnings / Total Assets** = $300,000 / $670,000 = 0.4478 **X₃ = EBIT / Total Assets** = $60,000 / $670,000 = 0.0896 **X₄ = Market Value of Equity / Book Value of Liabilities** = $380,000 / $240,000 = 1.5833 **X₅ = Sales / Total Assets** = $2,200,000 / $670,000 = 3.2836 Now calculate Z-score: Z = 1.2(0.2537) + 1.4(0.4478) + 3.3(0.0896) + 0.6(1.5833) + 0.999(3.2836) Z = 0.3044 + 0.6269 + 0.2957 + 0.9500 + 3.2803 Z = 5.4573 **Interpretation:** - Z > 2.99: Safe zone - 1.81 < Z < 2.99: Grey zone - Z < 1.81: Distress zone Since Z = 5.4573 > 2.99, ABC Corp falls in the **Safe zone**.
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The following financial data pertains to ABC Corp:
| Item | Value |
|---|---|
| Working capital | $170,000 |
| Total assets | $670,000 |
| Book value of liabilities | $240,000 |
| Market value of liabilities | $205,000 |
| Retained earnings | $300,000 |
| Market value of equity | $380,000 |
| Earnings before interest and taxes | $60,000 |
| Sales | $2,200,000 |
The Altman's Z-score equation is as follows:
When using the computed Z-score to classify ABC based on credit quality, what is the classification?
A
Safe zone
B
Grey zone
C
Distress zone
D
Not enough information to determine
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