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Altman's Z-Score Report
Altman's Z-Score Report
Report Name: -
A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank.
Submitted to Md. Omar Faruk Lecturer School of Business Administration Uttara University
Uttara University
Report
Report Name: -
A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank.
Submitted by Group name- Circle Group Members Saif Muhammad Fahad Rajib Sarker ID M20911111016 M20911111028
Uttara University
Letter of Transmittal
Date: 02th August, 2012 Md. Omar Faruk School of Business Administration Uttara University, Dhaka. Subject: Transmitting the report. Dear Sir, It is our pleasure to submit the report on the topic A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank. We have tried our best to analyze all necessary information related to our topic and present as affectionately as possible. It is not impossible that there will be minor mistakes in this report. But still we hope that this report will provide the appropriate analysis on the topic of A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank. In conclusion, we want to express our thanks to you, as without your co-operation it would barely impossible for us to prepare this report related to our subject. If you need any help to interpret anything of this assignment, please let me inform. Thanking you Group name: - Circle School of Business Administration Program B.B.A. Section 18th (A)
Table of content
Page No.
1. Executive summary 2. About the report 2.1 Introduction 2.2 Objectives of this Study 2.3 Methodology of the Study 2.4 Limitation of this project 3. Interpretation of Altmans Z-score 4. Data Analysis
.. 04 .. 06 .. 06 .. 07 .. 07 .. 08 .. 09 .. 10 - 15 .. 10 - 11
4.2 Calculating X2 = Retaining Earning/ Total Assets .. 12 4.3 Calculating X3 = EBIT/ Total Assets .. 13 .. 14 .. 15 .. 16 - 17 .. 17 .. 18 .. 19 .. 19
4.4 Calculating X4 = Equity/ Book value of debt 4.5 Calculating X5 = Sales/ Total Assets 5. Findings 6. Suggestion 7. Conclusion 8. References 9. Appendix
Executive Summary
This report is based on the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank. This kind of analytical report is the pre-requisite for the graduation in BBA. Classroom discussion alone cannot make a student perfect in handling the real business situation; therefore, it is an opportunity for the students to know about the real life situation through this program. A report has to be built for the university and organization requirement. The topic of the report is A study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank. The main purpose of the report becomes very clear from the topic of the report. The report discusses about the application of Altmans Z-score model in the particular area. This report is broadly categorized in six different parts. At first we give a short introduction about our report. In this part, we discuss about purpose of the report, objectives of report and scope of report. In part two, we try to give an overview of Square hospital, about their mission, vision. Here, we also try to discuss about Square floor presentation. In part three, here we discuss about various types of services which provide by Square hospital. In this part, we try to highlight about customer satisfaction method of Square hospital. Part four includes of methodology. In part five, we try to analyze the customer gap of Square hospital. Here, we find some defeats which may be decrease the customer satisfaction level in the future. In part six, we try give some recommendation that how can Square overcome those defeats. Here we also give a short conclusion.
Introduction
Altmans Z is one of the best known statistically derived predictive models used to forecast a firms impending bankruptcy. Edward Altman, a financial economist and professor at New Yorks stern School of Business, developed Altmans Z score model. The Z score gained acceptance by auditors, management accounts, and database systems beginning in the mid1980s. Although, Altman originally developed the Z- score based on a small sample of manufacturing firms, some research seems to show that it is useful in other areas, such as healthcare, with some modifications. Altmans Z-score formula is a multivariate formula used to measure the financial health of a company and to diagnose the probability that a company will go bankrupt within a two-year period. Studies of Altmans Z have yielded mixed results, and recent literature questions whether or not the formula, tested in the mid-twentieth century on manufacturing firms, is useful in todays marketplace. The Z- score uses various accounting ratios and market-derived price data to predict financial distress and future bankruptcy. The Altmans Z formula works well provided the scores fall within the in the tails meaning that low and high scores may more accurately predict financial distress than scores that fall in the gray area. More moderate scores may be easily misclassified. In the early 2000s, Altman amended the formula to allow its application to certain situations not originally included in the original sample set.
Secondary objectives
1. To measure the financial health of a bank and to diagnose the probability that a bank will go bankrupt within a two-year period. 2. To determine the creditworthiness of a bank. 3. To determine the risk in issuing loan for banks. 4. To determine the risks of the bank and to create a strategy in order to get the bank out of the danger of bankruptcy. 5. To predict bankruptcy. 6. To know about bank performance. 7. To know about bank condition.
Methodology
Both primary and secondary data are used here in this study for make the report fruitful. Here, I have used the secondary sources as the main of information.
Limitation
In this report, we measure just only one banks performance. We just used only 3 years data of Standard Bank. We only used this Altmans Z- score model for predicting bankruptcy. To continue study in such a vast area requires a big deal in time. As for my report, I had only one month time which is not enough. But I tried my best. 5. To collect information, I faced difficulties. 6. The study was limited by the availability of the data. 7. Some of the information was contradictory. 1. 2. 3. 4.
Here, X1= Working Capital / Total assets. X2 = Retained Earnings / Total assets. X3 = EBIT / Total Assets. X4 = Market value of Equity / Book value of debt X5 = Sales / Total Assets
Year 2009 WC TA X1 (WC/TA) 4,012,884,290 49,002,321,693 0.08189 2010 2,834,325,541 66,612,938,096 0.04254 2011 3,352,607,785 74,704,359,093 0.04487
Ratio
Year
Fig: Ratio of X1
Year 2009 RE TA X2 (RE/TA) 516,874,255 49,002,321,693 0.01054 2010 908,330,212 66,612,938,096 0.01363 2011 899,885,888 74,704,359,093 0.01204
Ratio
Year
Fig: Ratio of X2
Year
Interest/ Profit Total profit/loss paid on deposit & before tax borrowing 3,351,065,292 4,126,218,727 6,023,905,930 1,293,061,015 2,384,552,317 2,413,996,150
EBIT = Total profit/loss before tax+ Interest/ Profit paid on deposit & borrowing
Year 2009 EBIT TA X3 (EBIT/TA) 4,644,126,307 49,002,321,693 0.09477 2010 6,510,771,044 66,612,938,096 0.09774 2011 8,437,902,080 74,704,359,093 0.11295
0.115 0.11 0.105 0.1 0.095 0.09 0.085 2009 2010 2011 X3
Ratio
Year
Fig: Ratio of X3
Ratio
Year
Fig: Ratio of X4
Ratio
Year
Fig: Ratio of X5
Findings
Now, Z= 1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5 For the Year of 2009, Z = (1.20.08189) + (1.40.01054) + (3.30.09477) + (0.60.09449) + (1.00.09047) = 0.098268 + 0.014756 + 0.312741 + 0.056694 + 0.09047 = 0.572929 For the Year of 2010, Z = (1.20.04254) + (1.40.01363) + (3.30.09774) + (0.60.09253) + (1.00.08782) = 0.051048 + 0.019082 + 0.322542 + 0.055518 + 0.08782 = 0.995442 For the Year of 2011, Z = (1.20.04487) + (1.40.01204) + (3.30.11295) + (0.60.10268) + (1.00.10841) = 0.053844 + 0.016856 + 0.372735 + 0.061608 + 0.10841 = 0.613453
1.2 1
Output of "Z"
We know that, If Z> 2.99: Classified as financially sound. Z< 1.81: Classified as financially distressed or bankrupt. Here all the outcome figure of Z is less than 1.81. So, we can say that Standard bank is financially distressed or bankrupted for the last three years.
Suggestion
Conclusion
Although many performance indicators cannot be expected to incur a strong cue that a strategy does not yield the expected results, Altmans Z is argued by the some to be broad enough of an indicator for managers to notice. In other words, Altmans z may be employed to indicate financial distress. In this report, we have endeavored to show the efficacy of the Altmans Z-score in predicting financial distress in banks. Our goal has not been to suggest that Altmans Z is an end-all solution to predicting financial distress. However, we do suggest that it resides in the managers and investors toolbox for diagnosing the possibility of future financial distress.
Reference
1. Administrative Office of U.S. Courts. (2009). Bankruptcy statistics. Information retrieved on July, 2009, From http://www.uscourts.gov/bnkrpctystats/bankruptcystats.htm 2. Blockbuster gets going concern notice-SEC filing. (2009, April 6). Thomson Reuters. Information retrieved http://www.reuters.com/article/rbssRetailSpecialty/idUSN0641432620090406 3. Bakers Footwear Group Reports Fourth quarter and Fiscal 2008 Results. (2009, April 15). Thomson Reuters. Information retrieved from http://www.reuters.com/article/pressRelease/idUS99202+15-Apr2009+BW20090415
Appendix
1. Balance Sheet photocopy of Standard Bank of 2009, 2010 & 2011. 2. Income Statement photocopy of Standard Bank of 2009, 2010 & 2011. 3. Liquidity Statement photocopy of Standard Bank of 2009, 2010 & 2011.