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Homework answers / question archive / As a senior loan officer at National Capital Bank, you have the following loan application waiting for review

As a senior loan officer at National Capital Bank, you have the following loan application waiting for review

Accounting

As a senior loan officer at National Capital Bank, you have the following loan application waiting for review. The bank uses Altman’s Z-score to assess loan acceptability. The bank’s cost of equity is 9 per cent.

An AA-rated, one-year business loan from a firm with the following financial statement information (in millions of dollars):

Assets

  

Liabilities and Equity

Cash

$     40

  

Accounts payable

$     55

Accounts receivables

120

  

Notes payable

60

Inventory

100

  

Accruals

70
     

Long-term debt

650

Plant and equipment

 1210

  

Equity (ret. earnings = $200)

    635

Total assets

$1 470

  

Total liabilities and equity

$1 470


Also assume sales = $1250 million, cost of goods sold = $1100 million, and the market value of equity is equal to 2.0 times the book value. National Capital Bank uses the Altman’s Z-score model to evaluate AA-rated loans.

(a) What is the Altman discriminant function value for the loan applicant? (4 marks)

(b) Should you approve the application to your bank for a capital expansion loan? (1 mark)

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Altman Z- Score is calculated to identify the Companies financial position for Obtaining financial assistance from banks.

If any company having Altman Score-Z more than 3 then the financial condition of such company is strong and bank should provide the loan to such companies.

If any company having Altman Score-Z less than 1.8 than it is assumed that the financial position is not strong for such companies and bank should not provide any loan assistance to such companies.

If the score is between 1.8 and 3 then the bank is indifferent on such cases and in such cases bank should properly analyse the market position , market strategy, market share of such companies before providing any loan assistance.

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