Report

Report Name: -

A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank.

Submitted to Md. Omar Faruk Lecturer School of Business Administration Uttara University

Date of Submission- 02.08.2012 Word count- 2023 02th August, 2012

Uttara University

Report

Report Name: -

A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standard Bank.

Submitted by Group name- Circle Group Members Saif Muhammad Fahad Rajib Sarker ID M20911111016 M20911111028

School of Business Administration Uttara University

Date of Submission- 02.08.2012 Word 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 Altmans 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 Altmans 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 2. About the report 2.1 Introduction 2.2 Objectives of this Study 2.3 Methodology of the Study 2.4 Limitation of this project 3. Interpretation of Altmans Z-score 4. Data Analysis

.. 04 .. 06 .. 06 .. 07 .. 07 .. 08 .. 09 .. 10 - 15 .. 10 - 11

4.1 Calculating X1 = Working Capital/ Total Assets

4.2 Calculating X2 = Retaining Earning/ Total Assets .. 12 4.3 Calculating X3 = EBIT/ Total Assets .. 13 .. 14 .. 15 .. 16 - 17 .. 17 .. 18 .. 19 .. 19

4.4 Calculating X4 = Equity/ Book value of debt 4.5 Calculating X5 = Sales/ Total Assets 5. Findings 6. Suggestion 7. Conclusion 8. References 9. Appendix

Executive Summary
This report is based on the efficacy of Altmans 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 Altmans 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 Altmans 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
Altmans Z is one of the best known statistically derived predictive models used to forecast a firms impending bankruptcy. Edward Altman, a financial economist and professor at New Yorks stern School of Business, developed Altmans Z score model. The Z score gained acceptance by auditors, management accounts, and database systems beginning in the mid1980s. 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. Altmans 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 Altmans 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 todays marketplace. The Z- score uses various accounting ratios and market-derived price data to predict financial distress and future bankruptcy. The Altmans 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 Altmans 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. 2. 3. 4. 5. Annual report of Standard bank. Different manuals of Standard bank. Prospectus of Standard bank. Different papers about Altmans Z- score. Different text books, magazines & websites.

Limitation
In this report, we measure just only one banks performance. We just used only 3 years data of Standard Bank. We only used this Altmans Z- score model for predicting bankruptcy. 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. 1. 2. 3. 4.

Interpreting Altmans Z-score

Altmans Z is commonly employed to assess financial distress. Altmans Z is a weighted composite of financial indicators relating to profitability, revenue, slack resources and market return. When interpreting Altmans 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 Altmans 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 Altmans 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 2009 2010 2011

Current Assets (less than 1 year) 25,026,274,953 40,700,542,223 43,903,238,957

Current liabilities Working Capital= Current assets (less than 1 year)

Current liabilities

21,013,390,663 37,866,216,682 40,550,631,172

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

Year 2009 WC TA X1 (WC/TA) 4,012,884,290 49,002,321,693 0.08189 2010 2,834,325,541 66,612,938,096 0.04254 2011 3,352,607,785 74,704,359,093 0.04487

0.09 0.08 0.07 0.06

Ratio

0.05 0.04 0.03 0.02 0.01 0 2009 2010 2011 X1

Year

Fig: Ratio of X1

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.

Year 2009 RE TA X2 (RE/TA) 516,874,255 49,002,321,693 0.01054 2010 908,330,212 66,612,938,096 0.01363 2011 899,885,888 74,704,359,093 0.01204

0.016 0.014 0.012

Ratio

0.01 0.008 0.006 0.004 0.002 0 2009 2010 2011 X2

Year

Fig: Ratio of X2

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 Total profit/loss paid on deposit & before tax borrowing 3,351,065,292 4,126,218,727 6,023,905,930 1,293,061,015 2,384,552,317 2,413,996,150

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

2009 2010 2011

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

Year 2009 EBIT TA X3 (EBIT/TA) 4,644,126,307 49,002,321,693 0.09477 2010 6,510,771,044 66,612,938,096 0.09774 2011 8,437,902,080 74,704,359,093 0.11295

0.115 0.11 0.105 0.1 0.095 0.09 0.085 2009 2010 2011 X3

Ratio

Year

Fig: Ratio of X3

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.

Year 2009 Total Equity Amount Total liability X4 (Total Equity

Amount/Total liability)

2010 5,641,982,331 60,970,955,765 0.09253

2011 6,956,440,140 67,747,918,953 0.10268

4,230,535,359 44,771,786,339 0.09449

0.104 0.102 0.1 0.098

Ratio

0.096 0.094 0.092 0.09 0.088 0.086 2009 2010 2011 X4

Year

Fig: Ratio of X4

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.

Year 2009 Interest Income TA X5 (Interest

Income/TA)

2010 5,849,984,579 66,612,938,096 0.08782

2011 8,099,284,291 74,704,359,093 0.10841

4,433,634,888 49,002,321,693 0.09047

0.12 0.1 0.08

Ratio

0.06 0.04 0.02 0 2009 2010 2011 X5

Year
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 = (1.20.08189) + (1.40.01054) + (3.30.09477) + (0.60.09449) + (1.00.09047) = 0.098268 + 0.014756 + 0.312741 + 0.056694 + 0.09047 = 0.572929 For the Year of 2010, Z = (1.20.04254) + (1.40.01363) + (3.30.09774) + (0.60.09253) + (1.00.08782) = 0.051048 + 0.019082 + 0.322542 + 0.055518 + 0.08782 = 0.995442 For the Year of 2011, Z = (1.20.04487) + (1.40.01204) + (3.30.11295) + (0.60.10268) + (1.00.10841) = 0.053844 + 0.016856 + 0.372735 + 0.061608 + 0.10841 = 0.613453

1.2 1

Output of "Z"

0.8 0.6 0.4 0.2 0 2009 2010 2011 Z

Year Fig: Output 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, Altmans Z is argued by the some to be broad enough of an indicator for managers to notice. In other words, Altmans z may be employed to indicate financial distress. In this report, we have endeavored to show the efficacy of the Altmans Z-score in predicting financial distress in banks. Our goal has not been to suggest that Altmans Z is an end-all solution to predicting financial distress. However, we do suggest that it resides in the managers and investors 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, From http://www.uscourts.gov/bnkrpctystats/bankruptcystats.htm 2. Blockbuster gets going concern notice-SEC filing. (2009, April 6). Thomson Reuters. Information retrieved http://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-Apr2009+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.