CMA Final · Strategic Performance Management and Business Valuation · Corporate Failure
In the Altman Z-score model for a listed manufacturing company, the Z-score is calculated as 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5. Which ratio is represented by X4?
X4 in the original Altman Z-score is the market value of equity divided by the book value of total liabilities. It measures how far the firm's equity cushion can fall before liabilities exceed assets. Retained earnings to total assets is X2, not X4.
- ARetained earnings to total assets
- BMarket value of equity to book value of total liabilitiesCorrect
- CSales to total assets
- DWorking capital to total assets
Explanation
In the original Altman model, X1 is working capital/total assets, X2 retained earnings/total assets, X3 EBIT/total assets, X4 market value of equity/book value of total liabilities, and X5 sales/total assets. Retained earnings to total assets is X2, so it is not X4.
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