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4.8/5

solution

Assuming that an investor is concerned about his money invested in AMN Bank due to recent collapse of many banks. Therefore, he is considering withdrawing all his money from AAA Bank and investing in a new bank, AZM Bank. As an expert, provide suggestions to the investor so that he can make an informed decision. The following are the financial information of AMN Bank and AZM Bank.

Z-score = 1.2X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5

AMN BANK AZM BANK
Sales 4,500 2,000
Earning Before Interest and Tax 200 -120
Current Assets 1,800 800
Total Assets 2,700 1,200
Current Liabilities 1,500 750
Total Liabilities 1,700 1,000
Retained Earnings 800 -25
Market Value of Equity 1600 80

(a)Explain “Alman’s Z-score’ and the meaning of a score of less than 1.8.

(b)Calculate the Z-score ratio of AMN Bank and AZM Bank.

(c)Explain on the result obtained from Altman’s Z-score in predicting banks failure.

Solution:

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