E) Altman Z-score
Z score for year 2012:
Z= 1.2 (0.3833) + 1.4 (0.3975) + 3.3 (0.4248) + 0.6 (0.3841) + 1.0 (2.3047) = 4.9535 Z score for year 2013:
Z= 1.2 (0.2760) + 1.4 (0.2977) + 3.3 (0.4423) + 0.6 (0.2801) + 1.0 (2.3596) = 4.7352
The performance of the company in year 2013 decrease (0.2183) if compared with year 2012. However, z-score still above 2.99. There was 2 types of z-score model, since Dutch Lady company was public manufacturing firm, so it use the original Z-score model which means that a z-score above 2.99 shows the solvency. Thus, this company considered as safe zone and the bankruptcy of this company is unlikely to occur. The firm unlikely to default and the company’s credit risk is low. If a firm is non-manufacturing firm, it have to use modified z-score model. This type of model did not include the fifth ratio (X5: Sales/ Total assets). It was because they have less total assets if compare with manufacturing firms and the value from sales to total assets ratio will have a greater change in a z-score. It was no fair for non-manufacturing firm using the original z-score. So, a z-score above 2.6 was considered as safe zone.
Decreasing in z-score from year 2012 to 2013 is because of the decreasing in first, second and fourth ratio have a greater impact on Z-score if compared with decreasing in third and fifth ratio. The first ratio shows the short-term financial health of a firm. The higher the working capital than total assets, the better the liquidity of company. Dutch lady company with positive working capital for both year is rarely has problems to make payments since it has enough current assets to cover short-term obligations. Working Capital is used to analyze the assets required to run daily operations of a firm. If this ratio is...
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