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The Here Today Corporation has applied to your bank for a loan. You have their financial statements and the Z-score model of:
Z = 6.56*(Net Working Capital/Total Assets) + 3.26*(Accumulated Retained Earnings/Total Assets) + 1.05*(EBIT/Total Assets) + 6.72*(Book Value of Equity/Total Liabilities) where:
Z < 1.23 predicts bankruptcy; Z between 1.23 and 2.90 indicates a gray area; and Z > 2.90 indicates no bankruptcy.
From the financial statements, you gathered the following:
Net working capital $237,500
Accum. Retained Earnings: $120,000
BV of equity: $950,000
Total assets: $4,750,000
EBIT: $261,250
Total Liab.; $3,800,000
Should the bank lend to Here Today? Why or why not? Base your decision on the analysis of the financials listed above.
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