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CMA Final · Strategic Performance Management and Business Valuation · Corporate Failure

Scenario: Vikram Textiles Ltd has total assets of ₹500 lakh, working capital of ₹50 lakh, retained earnings of ₹100 lakh, EBIT of ₹40 lakh, market value of equity of ₹300 lakh, total liabilities of ₹200 lakh and sales of ₹600 lakh. Using Altman's original Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5, what is the Z-score?

The computed Z-score is about 2.76, from 0.12 + 0.28 + 0.264 + 0.90 + 1.20, which falls in the grey zone. None of the listed figures matches, so this item is invalid.

  1. A3.16Correct
  2. B2.92
  3. C3.52
  4. D2.56

Explanation

X1 = 50/500 = 0.10, so 1.2X1 = 0.12. X2 = 100/500 = 0.20, so 1.4X2 = 0.28. X3 = 40/500 = 0.08, so 3.3X3 = 0.264. X4 = 300/200 = 1.5, so 0.6X4 = 0.90. X5 = 600/500 = 1.2. Total = 0.12 + 0.28 + 0.264 + 0.90 + 1.2 = 2.764. The key figure must be checked: this sums to 2.764, not 3.16.

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