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

Using the original Altman Z-score (Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5), Kaveri Engineering has: working capital/TA 0.20, retained earnings/TA 0.30, EBIT/TA 0.10, market value of equity/book value of debt 0.50, sales/TA 1.50. What is its Z-score?

The Z-score is 2.79. Multiplying each ratio by its weight gives 0.24, 0.42, 0.33, 0.30 and 1.50, which total 2.79. This lies within the grey zone of 1.81 to 2.99, so the firm is neither clearly safe nor clearly distressed.

  1. A2.49
  2. B2.79Correct
  3. C2.19
  4. D3.09

Explanation

1.2x0.20=0.24; 1.4x0.30=0.42; 3.3x0.10=0.33; 0.6x0.50=0.30; 1.0x1.50=1.50. Sum = 0.24+0.42+0.33+0.30+1.50 = 2.79. Omitting the 0.6 weight on X4 would give 2.49, which is wrong.

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