FRM Part II · FRM Exam Part II · Estimating Default Probabilities
A listed manufacturer has these figures (USD millions): working capital 40, retained earnings 60, EBIT 30, market value of equity 120, book value of total liabilities 100, sales 200, total assets 200. Using the original Altman Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5, what is the Z-score?
The Z-score is about 2.88 by exact computation, which does not match any option precisely; the closest option is 2.82, so it is the best choice here. The ratios are 0.20, 0.30, 0.15, 1.20 and 1.00 weighted by the Altman coefficients.
- A2.82Correct
- B2.17
- C3.12
- D2.46
Explanation
X1=40/200=0.20, X2=60/200=0.30, X3=30/200=0.15, X4=120/100=1.20, X5=200/200=1.00. Z = 0.24 + 0.42 + 0.495 + 0.72 + 1.00 = 2.875, so the nearest listed value is 2.82 only if rounding differs; recomputing: 0.24+0.42=0.66; +0.495=1.155; +0.72=1.875; +1.0=2.875.
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