Reference no: EM132811934
MNO Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars.
Assets Liabilities and Equity
Cash $ 20 Accounts payable $ 30
Accounts receivables 90 Notes payable 40
Inventory 90 Accruals 30
Long-term debt 150
Plant and equipment 500 Equity (ret. earnings = $300) 450
Total assets $700 Total liabilities and equity $700
Also assume sales = $500,000; cost of goods sold = $360,000; and the market value of equity is equal to the book value.
a. What is the Altman discriminant function value for MNO Inc.? Recall that:
b. Based on the Altman's Z score only, should you approve MNO Inc.'s application to your bank for a $500,000 capital expansion loan?
c. If sales for MNO were $250,000, the market value of equity was only half of book value, and all other values are unchanged, would your credit decision change?
d. Would the discriminant function change for firms in different industries? Would the function be different for manufacturing firms in different geographic sections of the country? What are the implications for the use of these types of models by FIs?
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