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interpret your result where does the company fall in the financial distress range 644372

Case:  Bankruptcy Prediction

The Z score bankruptcy prediction model uses balance sheet and income information to arrive at a Z Score, which can be used to predict financial distress:

Z=Working capital/Total assets X 1.2 + Retained earnings / Total assets X 1.4 + EBIT / Total assets X 3.3 + Sales / Total assets X .99 + MV equity / Total liabilities X 0.6

EBIT is earnings before interest and taxes. MV Equity is the market value of common equity, which can be determined by multiplying stock price by shares outstanding.

Following extensive testing, it has been shown that companies with Z scores above 3.0 are unlikely to fail; those with Z scores below 1.81 are very likely to fail. While the original model was developed for publicly held manufacturing companies, the model has been modified to apply to companies in various industries, emerging companies, and companies not traded in public markets.

Instructions

(a) Use information in the financial statements of a company like Walgreens or Deere & Co. to compute the Z score for the past 2 years.

(b) Interpret your result. Where does the company fall in the financial distress range?

(c) The Z score uses EBIT as one of its elements. Why do you think this income measure is used?

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