Altman z score for public companies

Bloomberg Task 1

In your first Bloomberg task you will have to use Altman’s Z score to determine if companies are going to

fail in the near future. Here is a description of the Altman’s Z score:

“The Z-Score formula for predicting bankruptcy was published in 1968 by Edward Altman , who was at the time,

an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-Scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-Score uses multiple corporate income and balance sheet values to measure the financial health of a company. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event. In a series of subsequent tests covering three different time periods over the next 31 years (up until 1999), the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event.” For more information, see: http://en.wikipedia.org/wiki/Altman_Z-score.

The following is the formula for most public companies (there are small differences for financial

companies, private companies as so on)

Z=1.2X1+1.4X2+3.3X3+0.6X4+0.999X5

X 1 = Working Capital / Total Assets

X 2 = Retained Earnings / Total Assets

X 3 = EBIT / Total Assets

X 4 = Market Value of Equity /Book Value of Total Liabilities

X 5 = Sales/ Total Assets

A Z score higher than 2.99 is considered a safe score; between 1.8 and 2.99 it is a grey area; below 1.8 is the danger area. Each of you were assigned a “blue chip” company. You will need to find a company that is in more

danger than blue chips. Bloomberg uses a system of rankings and computes the probability of default.

It is under the function DRSK. The following grab shows an example. You will select companies with HY

2 and above. Those companies have higher probabilities of default.

To select such companies I suggest that you search for companies that have bonds rated CCC- to CCC+.

To do so you will need to go to CORP and do a search. I suggest the following fields for your search.

However, any other way you devise to select companies with a high HY is fine by me.

Once you have the second company you will have to compute the Z scores for the past three years for

both companies. You will compare the scores between the “blue chip” and the “danger zone” company

and determine if the Z score you computed is similar with the one that you can find for both companies

in Bloomberg. In addition, you will see if the Z score you computed is correlated with the probability of

default that Bloomberg computed in DRSK. As a conclusion you will need to make a prediction if the

danger zone company will default in the next two years.

You will present your results in a format that will include your computations, your comments and the

necessary Bloomberg grabs that show your work (mainly the DRSK grabs of your two companies and

some grabs showing an example on how you extracted the relevant data.)

You will have to submit the assignment as a word document through Blackboard by the due date.