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

Under the Altman Z-score model for listed manufacturing companies, a firm with a Z-score of 1.5 would be classified as being in which zone, and what does this indicate?

A Z-score of 1.5 lies below the 1.81 cutoff of the original Altman model, so the firm falls in the distress zone, signalling a high probability of corporate failure. Scores between 1.81 and 2.99 are grey and above 2.99 are safe.

  1. ASafe zone, with low probability of failure
  2. BDistress zone, with high probability of failureCorrect
  3. CGrey zone, with uncertain outcome
  4. DSafe zone, because the score is positive

Explanation

For the original model, a Z-score below 1.81 falls in the distress zone, 1.81 to 2.99 is the grey zone, and above 2.99 is safe. A score of 1.5 is below 1.81, so the firm is in the distress zone. Calling it grey ignores the 1.81 lower cutoff.

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