Using a modified discriminant function similar to Altman’s, a bank estimates the following coefficients for its portfolio of loans:
Z = 1.4X1 + 1.09X2 + 1.5X3
Where X1 = debt to asset ratio; X2 = net income and X3 = dividend payout ratio.
1. What is the Z-score if the debt to asset ratio is 40 percent, net income is 12 percent, and the dividend payout ratio is 60 percent?
2. Using Z=1.682 as the cut-off rate, what should be the debt to asset ratio of the firm in order for the bank to approve the loan?
a. 40.0 percent.
b. 46.5 percent.
c. 51.5 percent.
d. 54.0 percent.
e. 65.0 percent.
These short questions belong to Finance and it is about calculating the Z score for bank with asset to debt ratio, net income and dividend payout ratio given and if the cut-off rate is given, the bank’s debt to asset ratio.
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