1. Purpose: The purpose of this project is to provide hands-on opportunity to conduct a simple Credit Risk Analysis (covered in Unit 9, Week 3), using the Altman Z-Score model. Use the information provided in the Excel spreadsheet under the same folder as this handout (see also Week 3 Class Notes) to calculate the Altman’s Z-Score of ELVA Product, Inc., and comment on your results.
1) Use Model 1 in the posted accompanying spreadsheet to predict the probability of financial distress and possibly bankruptcy for ELVA, assuming ELVA is a public company.
2) To decide whether ELVA will experience financial distress or not, refer to the proposed cutoff points, which are part of the models presented on page 1 of the spreadsheet. (Also see posted sample spreadsheet)
3) Based on the results you obtained, assign a likely “Credit Rating,” per Standard & Poors or Moody’s classification, as discussed in the relevant class material or your own research. Please, provide complete and detailed reference(s) if you use your own researched material or additional sources for the analysis and assignment of a rating.
4) Note that the Altman’s variable X1 involves “Net Working Capital” that equals “Current Assets” less “Current Liabilities”, which you should calculate from the balance sheet for each year. For variable X4, please use the “Book Value of All Assets” as a proxy for “Market Value of All Assets.”
5) The key information for solving this project is presented in the balance sheets and income statements of ELVA, which appear on page 3 of the Excel spreadsheet.
6) The customary financial ratios are presented on page 2 of the spreadsheet for your reference.
7) The Altman’s Z-Score models, including the definition of the variables, is presented on the first page of the spreadsheet. Also, refer to read the article below for more details about the models.
Altman, E. I., “Predicting Financial Distress of Companies: Revisiting the Z-Score and ZETA® Models” (July 2000)
3. Assessment Rubrics:
MAX POINTS CRITERIA
4 points Adequate application of analytical skills and implementation of the correct model in the Excel Spreadsheet.
4 points Correct interpretation of the variable and calculations. One (1) point will be deducted for each variable that is misinterpreted and incorrectly measured.
2 points Adequate interpretation of the final findings and conclusion (correct numerical results and meaningful rating estimate).
10 POINTS Potential maximum points to be earned for meeting or exceeding expectations.