Chapter 15

Question 1

current ratio

Answer 1

current assets/ current liabilities

Question 2

quick ratio

Answer 2

(current assets - inventory )/ current liabilities

Question 3

interest cover

Answer 3

PBIT / Interest payable

Question 4

gearing ratio

Answer 4

long term debt / ( long term debt + equity)

Question 5

operational gearing

Answer 5

fixed costs / variable costs

Question 6

problems with ratio analysis

Answer 6

historical

ignores non financial issues

industry average is not appropriate to benchmark to analyse risk of failure

Question 7

2 prediction models

Answer 7

Altmans Z Score

Argenti’s A score

Question 8

what score on Altmans Z score is likely to fail in the next 2 years

Answer 8

less than 1,8

Question 9

what score on altmans z score is safe

Answer 9

over 3

Question 10

what is between 1.8 and 3

Answer 10

the eventual failure or non failure cannot be predicted with uncertainty

Question 11

weakness of quantative measures

Answer 11

fails to include internal weakness that aren’t financial

does not consider the risk of a change in environmental factors

Question 12

criticisms of Z Model

Answer 12

based on a sample of companies in US

analysis performed in 1960s

sample was only manufacturing companies

Question 13

in argentis A score - what means there is no weakness

Answer 13

0

Question 14

maximum score for defects ( Argenti)

Answer 14

10

Question 15

maximum score for mistakes ( Argenti)

Answer 15

15

Question 16

maximum score for symptoms ( Argenti)

Answer 16

0

Question 17

maximum score for total ( Argenti)

Answer 17

25

Question 18

what is considered safe

Answer 18

below 18

Question 19

what is considered likely to fail

Answer 19

25 and over

Question 20

disadvantage of argenti score

Answer 20

judgement of risk is subjective

lack of formal testing to prove models validity

lack of industry considerations

focuses mainly on internal factors