Discriminant Credit Models
Overview
Credit Risk Models
Linear Discriminant
Altman Z-Score
{% Z = 0.012 x_1 + 0.014X_2 + 0.033 X_3 +0.006 X_4 + 0.999 X_5 %}
- {% X_1 %} = working capital/total assets
- {% X_2 %} = retained earnings/total assets
- {% X_3 %} = earning before interest and taxes (EBIT)/total assets
- {% X_4 %} = market value of equity/book value of total liabilities
- {% X_5 %} = sales/total assets
A company with a Z-score below 1.81 is classified as bad in the initial study.
