Report

Report Name: - A Study of the efficacy of Altman’s Z score model to predict bankruptcy of Standard Bank.

Submitted toMd. Omar Faruk

LecturerSchool of Business Administration

Uttara University

Date of Submission- 02.08.2012Word count- 2023

02th August, 2012

Uttara University

Report

Report Name: - A Study of the efficacy of Altman’s Z score model to predict bankruptcy of Standard Bank.

Submitted byGroup name- Circle

Group Members ID

Saif Muhammad Fahad M20911111016

Rajib Sarker M20911111028

School of Business AdministrationUttara University

Date of Submission- 02.08.2012Word count- 2023

02th August, 2012

Uttara University

Letter of Transmittal

Date: 02th August, 2012

Md. Omar Faruk

School of Business Administration

Uttara University,

Dhaka.

Subject: Transmitting the report.

Dear Sir,

It is our pleasure to submit the report on the topic “A Study of the efficacy of Altman’s Z score

model to predict bankruptcy of Standard Bank”.

We have tried our best to analyze all necessary information related to our topic and present as affectionately as possible. It is not impossible that there will be minor mistakes in this report. But still we hope that this report will provide the appropriate analysis on the topic of “A Study of the

efficacy of Altman’s Z score model to predict bankruptcy of Standard Bank”.

In conclusion, we want to express our thanks to you, as without your co-operation it would barely impossible for us to prepare this report related to our subject. If you need any help to interpret anything of this assignment, please let me inform.

Thanking you

Group name: - Circle

School of Business Administration

Program – B.B.A.

Section – 18th (A)

Table of content

Page No.

1. Executive summary ……………………………….. 04

2. About the report ……………………………….. 06

2.1 Introduction ……………………………….. 06

2.2 Objectives of this Study ……………………………….. 07

2.3 Methodology of the Study ……………………………….. 07

2.4 Limitation of this project ……………………………….. 08

3. Interpretation of Altman’s Z-score ……………………………….. 09

4. Data Analysis ……………………………….. 10 - 15

4.1 Calculating X1 = Working Capital/ Total Assets …………………….. 10 - 11

4.2 Calculating X2 = Retaining Earning/ Total Assets …………………….. 12

4.3 Calculating X3 = EBIT/ Total Assets ……………………………….. 13

4.4 Calculating X4 = Equity/ Book value of debt ……………………….. 14

4.5 Calculating X5 = Sales/ Total Assets ……………………….. 15

5. Findings ……………………………….. 16 - 17

6. Suggestion ……………………………….. 17

7. Conclusion ……………………………….. 18

8. References ……………………………….. 19

9. Appendix ……………………………….. 19

Executive Summary

This report is based on the efficacy of Altman’s Z score model to predict bankruptcy of Standard Bank.

This kind of analytical report is the pre-requisite for the graduation in BBA. Classroom discussion alone cannot make a student perfect in handling the real business situation; therefore, it is an opportunity for the students to know about the real life situation through this program. A report has to be built for the university and organization requirement.

The topic of the report is “A study of the efficacy of Altman’s Z score model to predict bankruptcy of Standard Bank”. The main purpose of the report becomes very clear from the topic of the report. The report discusses about the application of Altman’s Z-score model in the particular area.

This report is broadly categorized in six different parts. At first we give a short introduction about our report. In this part, we discuss about purpose of the report, objectives of report and scope of report. In part two, we try to give an overview of Square hospital, about their mission, vision. Here, we also try to discuss about Square floor presentation. In part three, here we discuss about various types of services which provide by Square hospital. In this part, we try to highlight about customer satisfaction method of Square hospital. Part four includes of methodology.

In part five, we try to analyze “the customer gap” of Square hospital. Here, we find some defeats which may be decrease the customer satisfaction level in the future.

In part six, we try give some recommendation that how can Square overcome those defeats. Here we also give a short conclusion.

Introduction

Altman’s Z is one of the best known statistically derived predictive models used to forecast a firm’s impending bankruptcy. Edward Altman, a financial economist and professor at New York’s stern School of Business, developed Altman’s Z score model. The Z score gained acceptance by auditors, management accounts, and database systems beginning in the mid- 1980s. Although, Altman originally developed the Z- score based on a small sample of manufacturing firms, some research seems to show that it is useful in other areas, such as healthcare, with some modifications.

Altman’s Z-score formula is a multivariate formula used to measure the financial health of a company and to diagnose the probability that a company will go bankrupt within a two-year period. Studies of Altman’s Z have yielded mixed results, and recent literature questions whether or not the formula, tested in the mid-twentieth century on manufacturing firms, is useful in today’s marketplace.

The Z- score uses various accounting ratios and market-derived price data to predict financial distress and future bankruptcy. The Altman’s Z formula works well provided the scores fall within the “in the tails” meaning that low and high scores may more accurately predict financial distress than scores that fall in the gray area. More moderate scores may be easily misclassified. In the early 2000s, Altman amended the formula to allow its application to certain situations not originally included in the original sample set.

Objectives of the report

Primary objectives

The primary objectives of this report are to apply Altman’s Z-score in particular area and to evaluate the performance of Standard Bank and difficulties.

Secondary objectives

1. To measure the financial health of a bank and to diagnose the probability that a bank will go bankrupt within a two-year period.

2. To determine the creditworthiness of a bank.3. To determine the risk in issuing loan for banks.4. To determine the risks of the bank and to create a strategy in order to get the bank out of

the danger of bankruptcy.5. To predict bankruptcy.6. To know about bank performance.7. To know about bank condition.

Methodology

Both primary and secondary data are used here in this study for make the report fruitful. Here, I have used the secondary sources as the main of information.

Primary sources of data

1. Face to face conversation with course teacher & faculty.2. Informal conversation with classmates.

Secondary sources of data

1. Annual report of Standard bank.2. Different manuals of Standard bank.3. Prospectus of Standard bank.4. Different papers about Altman’s Z- score.5. Different text books, magazines & websites.

Limitation

1. In this report, we measure just only one bank’s performance.2. We just used only 3 years data of Standard Bank.3. We only used this Altman’s Z- score model for predicting bankruptcy.4. To continue study in such a vast area requires a big deal in time. As for my report, I had

only one month time which is not enough. But I tried my best.5. To collect information, I faced difficulties.6. The study was limited by the availability of the data.7. Some of the information was contradictory.

Interpreting Altman’s Z-score

Altman’s Z is commonly employed to assess financial distress. Altman’s Z is a weighted composite of financial indicators relating to profitability, revenue, slack resources and market return. When interpreting Altman’s Z-score, higher values indicate that banks “carry out more actions at a fast pace”, while low scores indicate that bank “carry out low few total actions and respond slowly.”

Once a Z-score has been determined, the ratio is then compared to Altman’s predetermined cutoffs. Altman postulated that banks with a Z-score < 1.8 were likely to experience bankruptcy; banks with a Z-score 1.8 to 2.99 were in a zone of ignorance or a grey zone in which distress may or may not be impending. Last, banks with a Z-score of > 2.99 were likely to be financially sound.

However, there is no single formula that has the power to predict the future; Z-score users should look at they interpret the score rather than just looking at the score itself, which is only a snapshot in time.

Data Analysis & Interpretation

In this report, we use Altman’s Z score bank model to calculate the performance of Standard bank. We apply this model for predicting bankruptcy.

Here, we only use the data of the year 2009, 2010 and 2011.

Now, we know that

Z= 1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5

Here,

X1= Working Capital / Total assets.

X2 = Retained Earnings / Total assets.

X3 = EBIT / Total Assets.

X4 = Market value of Equity / Book value of debt

X5 = Sales / Total Assets

X1 = Working capital/ Total asset

Working Capital: Working capital is the money available at short notice to fund the activities of the company. Working capital is calculated by subtracting the current short- term debts from the cash and cash equivalents. A company with a positive working capital can immediately pay their short term debts, when the creditors want the company to pay. If a company generates profits, working capital will grow, unless they give away all profits.

Total Assets: Total assets are all assets on the balance sheet of a company. This concerns both the cash and the properties for which a longer- term investment was needed.

We know that,

Working Capital (WC) = Current assets – Current liabilities.

So, Working Capital of Standard Bank is

Year Current Assets (less than 1 year)

Current liabilities (less than 1 year)

Working Capital=Current assets - Current liabilities

2009 25,026,274,953 21,013,390,663 4,012,884,290

2010 40,700,542,223 37,866,216,682 2,834,325,541

2011 43,903,238,957 40,550,631,172 3,352,607,785

Year2009 2010 2011

WC 4,012,884,290 2,834,325,541 3,352,607,785

TA 49,002,321,693 66,612,938,096 74,704,359,093

X1 (WC/TA) 0.08189 0.04254 0.04487

Fig: Ratio of X1

2009 2010 20110

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

Column1

Year

Rat

io

X2 = Retain Earning /Total Assets

Retain Earning: The retaining earning is the sum of all profits earned in the past, that is was available to reinvest in the company. This refers to the total profits minus dividends and taxes. For young companies, this figure is relatively low, because they had fewer years to build up their retained earnings. Also companies in emerging markets will usually have less retained earnings, just because most companies in these markets will be young companies.

Total Assets: Total assets are all assets on the balance sheet of a company. This concerns both the cash and the properties for which a longer- term investment was needed.

Year2009 2010 2011

RE 516,874,255 908,330,212 899,885,888

TA 49,002,321,693 66,612,938,096 74,704,359,093

X2 (RE/TA) 0.01054 0.01363 0.01204

Fig: Ratio of X2

2009 2010 20110

0.002

0.004

0.006

0.008

0.01

0.012

0.014

0.016

Column2

Year

Rat

io

X3 = EBIT/ Total Assets

EBIT: EBIT is all profits before taking into account interest payments and income taxes

Total Assets: Total assets are all assets on the balance sheet of a company. This concerns both the cash and the properties for which a longer- term investment was needed.

Year Interest/ Profit paid on deposit & borrowing

Total profit/loss before tax

EBIT = Total profit/loss before tax+ Interest/ Profit paid on deposit & borrowing

2009 3,351,065,292 1,293,061,015 4,644,126,307

2010 4,126,218,727 2,384,552,317 6,510,771,044

2011 6,023,905,930 2,413,996,150 8,437,902,080

Year2009 2010 2011

EBIT 4,644,126,307 6,510,771,044 8,437,902,080

TA 49,002,321,693 66,612,938,096 74,704,359,093

X3 (EBIT/TA) 0.09477 0.09774 0.11295

Fig: Ratio of X3

2009 2010 20110.085

0.09

0.095

0.1

0.105

0.11

0.115

Column1

Year

Rat

io

X4 = Total Equity Amount/ Total liability or book value of debt

Total Equity Amount: A type of mutual fund that invests in high-quality companies with a reliable history of dividend payments and growth in the dividend rate.

Total liability: The amount of the debt can be gathered from the balance sheet. Both long term and short term debt are part of this parameter. The reserve, which is also on the credit side of the balance sheet, is no part of this parameter.

Year2009 2010 2011

Total Equity Amount

4,230,535,359 5,641,982,331 6,956,440,140

Total liability 44,771,786,339 60,970,955,765 67,747,918,953

X4 (Total Equity Amount/Total liability)

0.09449 0.09253 0.10268

Fig: Ratio of X4

2009 2010 20110.086

0.088

0.09

0.092

0.094

0.096

0.098

0.1

0.102

0.104

Column1

Year

Rat

io

X5 = Interest Income or sales/ Total Assets

Interest Income: The difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities.

Total Assets: Total assets are all assets on the balance sheet of a company. This concerns both the cash and the properties for which a longer- term investment was needed.

Year2009 2010 2011

Interest Income 4,433,634,888 5,849,984,579 8,099,284,291

TA 49,002,321,693 66,612,938,096 74,704,359,093

X5 (Interest Income/TA)

0.09047 0.08782 0.10841

2009 2010 20110

0.02

0.04

0.06

0.08

0.1

0.12

Column1

Year

Rat

io

Fig: Ratio of X5

Findings

Now, Z= 1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5

For the Year of 2009,

Z = (1.2×0.08189) + (1.4×0.01054) + (3.3×0.09477) + (0.6×0.09449) + (1.0×0.09047)

= 0.098268 + 0.014756 + 0.312741 + 0.056694 + 0.09047

= 0.572929

For the Year of 2010,

Z = (1.2×0.04254) + (1.4×0.01363) + (3.3×0.09774) + (0.6×0.09253) + (1.0×0.08782)

= 0.051048 + 0.019082 + 0.322542 + 0.055518 + 0.08782

= 0.995442

For the Year of 2011,

Z = (1.2×0.04487) + (1.4×0.01204) + (3.3×0.11295) + (0.6×0.10268) + (1.0×0.10841)

= 0.053844 + 0.016856 + 0.372735 + 0.061608 + 0.10841

= 0.613453

Fig: Output of “Z”

2009 2010 20110

0.2

0.4

0.6

0.8

1

1.2

Column1

Year

Ou

tpu

t of

"Z

"

We know that,

If Z> 2.99: Classified as financially sound.

Z< 1.81: Classified as financially distressed or bankrupt.

Here all the outcome figure of Z is less than 1.81. So, we can say that Standard bank is financially distressed or bankrupted for the last three years.

Suggestion

Conclusion

“Although many performance indicators cannot be expected to incur a strong cue that a strategy does not yield the expected results, Altman’s Z is argued by the some to be broad enough of an indicator for managers to notice.” In other words, Altman’s z may be employed to indicate financial distress.

In this report, we have endeavored to show the efficacy of the Altman’s Z-score in predicting financial distress in banks.

Our goal has not been to suggest that Altman’s Z is an end-all solution to predicting financial distress. However, we do suggest that it resides in the manager’s and investor’s toolbox for diagnosing the possibility of future financial distress.

Reference

1. Administrative Office of U.S. Courts. (2009). Bankruptcy statistics. Information retrieved on July, 2009, Fromhttp://www.uscourts.gov/bnkrpctystats/bankruptcystats.htm

2. Blockbuster gets going concern notice-SEC filing. (2009, April 6). Thomson Reuters. Information retrievedhttp://www.reuters.com/article/rbssRetailSpecialty/idUSN0641432620090406

3. Bakers Footwear Group Reports Fourth quarter and Fiscal 2008 Results. (2009, April 15). Thomson Reuters. Information retrieved from http://www.reuters.com/article/pressRelease/idUS99202+15-Apr-2009+BW20090415

Appendix

1. Balance Sheet photocopy of Standard Bank of 2009, 2010 & 2011.2. Income Statement photocopy of Standard Bank of 2009, 2010 & 2011.3. Liquidity Statement photocopy of Standard Bank of 2009, 2010 & 2011.