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

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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):

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)