E 20.1.

CREDIT SCORING

The information in the excerise is sufficient to calculate a Z-score

Market value of equity, 2011= $ 25 x 80 million shares= $ 2000 million
Market value of equity, 2012= $ 15 x 80 million shares= $ 1200 million
Z-score= 1.2

+ 3.3

+ 0.6

+ 1.0

Working capital
Total assets

Retained earnings
Total assets

Earnings before interest and taxes

total assets

Market value of equity

Book value of liabilities

Sales
Total assets

For 2011,

Z-score
= 1.2

+ 3.3

= 2.68

1387-1292
3245

154
3245

+ 0.6

+ 1.4

865
3245

2000
3245 - 1765

+ 1.0

4238
3245

For 2012,
Z - score
= 1.2

+ 3.3

+ 1.4

976 - 1390
3098

- 423
3098

+ 0.6

1200
3098 - 1388

488
3098

+ 1.0

3276
3098

= 1. 09
There is a deterioration of the Z- score over the year, from 2.68 down to 1. 09.

RATIO

WEIGHT

1997

1998

1999

2000

Working
capital to
Total
Assets

1.2

0.077

0.073

0.013

0.004

Retained
earnings
to Total
Assets

1.4

0.514

0.579

0.567

0.569

EBIT to
Total
Assets

3.3

0.094

0.106

0.062

MV of
Equity to
BV of
Liabilities

0.6

1.653

2.154

0.998

0.565

Sales to
Total
Assets

1.0

1.238

1.386

1.414

1.420

zscore

3.4

3.9

2.8

2.8

Z - scores have declined, due largely to a decline

in the market value of equity ( that reflects the
decline in profitability and growth ).The decline in
profitability ( EBIT to total assets ) has reduced
the Z - scores by 0.1 from 1997 to 2000, and the
decline in working capital total assets has reduced
it by 0.09.