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The coefficients respectively for X1, X2, X3, X4 and X5 are .01, .02, .03, .04 and...

The coefficients respectively for X1, X2, X3, X4 and X5 are .01, .02, .03, .04 and .05. Compute the Z score. Analyze whether this firm will fail, or not and why. Explicate the meaning of the Xs.

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Answer #1

Z=(0.012*0.01+0.014*0.02+0.033*0.03+0.006*0.04+ 0.999*0.05)*100=5.158

As Z is more than 2.99, the firm is in safe zone and will not fail

X1 = working capital / total assets
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = market value of equity / total liabilities
X5 = sales / total assets

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