1. Calculate the Altman Z-score for Ford and Toyota. What inferences do you draw

Question

1. Calculate the Altman Z-score for Ford and Toyota. What inferences do you draw from

these values? What inferences do you draw from comparing the values across the two

companies? (You may assume that the market value of equity for Ford and Toyota,

respectively as of their 2012 fiscal year ends, is $38 billion and $110 billion.)

2. What do you predict would happen if Ford’s auditors issued a going-concern audit

opinion? How would suppliers react? How would debt holders react?

3. Why might an audit firm be hesitant to issue a going-concern opinion?

4. What would happen to an audit firm if it did NOT issue a going-concern opinion and

the company goes bankrupt in the following year?

Explanation / Answer

Since data is not provided with, a general approach has been prescribed in answer.

The basic z score formula for a sample is:
z = x – /
For example, let’s say you have a test score of 190. The test has a mean () of 150 and a standard deviation () of 25. Assuming a normal distribution, your z score would be:
z = x – /
= 190 – 150 / 25 = 1.6.
The z score tells you how many standard deviations from the mean your score is. In this example, your score is 1.6 standard deviations above the mean.

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