Forecasting and Risk Indicators BS2203 Z-Score, M-Score & FCF
Tools
Multi-Media University
May 2025
Introduction
This Forecasting and Risk Indicators Guide for BS2203 at Multi-Media University equips students
with skills to apply Altmans Z-Score, Beneish M-Score, and Free Cash Flow (FCF) tools for financial
analysis and forecasting. Designed for advanced undergraduates, it includes interactive examples and
a 30-question exam with "secret hints and helpers" to maximize scores.
1 Altmans Z-Score
Altmans Z-Score predicts bankruptcy risk using financial ratios:
• Formula (Public Companies): Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 , where:
– X1 = Working Capital / Total Assets (liquidity).
– X2 = Retained Earnings / Total Assets (profit retention).
– X3 = EBIT / Total Assets (operating efficiency).
– X4 = Market Value of Equity / Total Liabilities (leverage).
– X5 = Sales / Total Assets (asset turnover).
• Interpretation: Z > 2.99 (safe), 1.812.99 (grey zone), < 1.81 (distress).
Insight: High Z-Scores indicate financial health; low scores signal distress, requiring investigation of
liquidity and leverage.
Interactive Example 1: A company has Working Capital = $200,000, Total Assets = $2,000,000,
Retained Earnings = $400,000, EBIT = $300,000, Market Value of Equity = $1,500,000, Total Lia-
bilities = $1,000,000, Sales = $3,000,000. Calculate the Z-Score.
200,000
• Step 1 : X1 = 2,000,000 = 0.1.
400,000
• Step 2 : X2 = 2,000,000 = 0.2.
300,000
• Step 3 : X3 = 2,000,000 = 0.15.
1,500,000
• Step 4 : X4 = 1,000,000 = 1.5.
3,000,000
• Step 5 : X5 = 2,000,000 = 1.5.
• Step 6 : Z = 1.2(0.1) + 1.4(0.2) + 3.3(0.15) + 0.6(1.5) + 1.0(1.5) = 0.12 + 0.28 + 0.495 + 0.9 + 1.5 =
3.295.
• Interpretation: A Z-Score of 3.295 (> 2.99) indicates financial stability. Monitor X1 (liquidity)
for potential improvement.
2 Beneish M-Score
Beneish M-Score detects earnings manipulation using eight financial ratios:
1
, BS2203 Financial Analysis Multi-Media University
• Formula: M = −4.84 + 0.92 · DSRI + 0.528 · GMI + 0.404 · AQI + 0.892 · SGI + 0.115 · DEPI −
0.172 · SGAI + 4.679 · TATA − 0.327 · LVGI, where:
– DSRI = Days Sales in Receivables Index.
– GMI = Gross Margin Index.
– AQI = Asset Quality Index.
– SGI = Sales Growth Index.
– DEPI = Depreciation Index.
– SGAI = Sales, General, and Administrative Expenses Index.
– TATA = Total Accruals to Total Assets.
– LVGI = Leverage Index.
• Interpretation: M > -1.78 suggests manipulation; M < -1.78 indicates low risk.
Insight: High M-Scores may reflect aggressive accounting; focus on DSRI and TATA for red flags.
Interactive Example 2: A simplified M-Score calculation uses DSRI = 1.2, GMI = 1.1, AQI = 1.0,
SGI = 1.3, DEPI = 1.0, SGAI = 1.0, TATA = 0.05, LVGI = 1.0. Calculate the M-Score.
• Step 1 : M = −4.84 + 0.92(1.2) + 0.528(1.1) + 0.404(1.0) + 0.892(1.3) + 0.115(1.0) − 0.172(1.0) +
4.679(0.05) − 0.327(1.0).
• Step 2 : M = −4.84+1.104+0.5808+0.404+1.1596+0.115−0.172+0.23395−0.327 ≈ −1.74165.
• Interpretation: An M-Score of -1.742 (< -1.78) suggests low manipulation risk. Monitor DSRI
(1.2) for potential receivables issues.
3 Free Cash Flow (FCF) Tools
FCF measures cash available after operating and capital expenses, used for valuation and performance:
• Formulas:
– FCF to Firm (FCFF) = EBIT(1 - Tax Rate) + Depreciation - Change in Working Capital
- Capital Expenditures.
– FCF to Equity (FCFE) = Net Income + Depreciation - Change in Working Capital -
Capital Expenditures + Net Borrowing.
• Forecasting: Project revenues, expenses, and investments; adjust for economic conditions (e.g.,
highlights FCFs role in performance).[](https://pmc.ncbi.nlm.nih.gov/articles/PMC10281586/)
Insight: Positive FCF supports growth and debt repayment; negative FCF may signal operational
issues.
Interactive Example 3: A company has EBIT = $500,000, Tax Rate = 30%, Depreciation =
$100,000, Change in Working Capital = $50,000, Capital Expenditures = $150,000. Calculate FCFF.
• Step 1 : EBIT(1 - Tax Rate) = 500, 000 × (1 − 0.3) = $350, 000.
• Step 2 : FCFF = 350, 000 + 100, 000 − 50, 000 − 150, 000 = $250, 000.
• Interpretation: FCFF of $250,000 indicates cash available for all investors. Forecast future FCF
using revenue growth and cost trends (e.g.,).[](https://pmc.ncbi.nlm.nih.gov/articles/PMC10281586/)
BS2203 Exam Forecasting and Risk Indicators
This exam tests BS2203 skills in Z-Score, M-Score, and FCF tools. It includes 30 questions: 20
multiple-choice (2 marks each, 40 marks), 5 calculation (4 marks each, 20 marks), and 5 analysis (4
2
Tools
Multi-Media University
May 2025
Introduction
This Forecasting and Risk Indicators Guide for BS2203 at Multi-Media University equips students
with skills to apply Altmans Z-Score, Beneish M-Score, and Free Cash Flow (FCF) tools for financial
analysis and forecasting. Designed for advanced undergraduates, it includes interactive examples and
a 30-question exam with "secret hints and helpers" to maximize scores.
1 Altmans Z-Score
Altmans Z-Score predicts bankruptcy risk using financial ratios:
• Formula (Public Companies): Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 , where:
– X1 = Working Capital / Total Assets (liquidity).
– X2 = Retained Earnings / Total Assets (profit retention).
– X3 = EBIT / Total Assets (operating efficiency).
– X4 = Market Value of Equity / Total Liabilities (leverage).
– X5 = Sales / Total Assets (asset turnover).
• Interpretation: Z > 2.99 (safe), 1.812.99 (grey zone), < 1.81 (distress).
Insight: High Z-Scores indicate financial health; low scores signal distress, requiring investigation of
liquidity and leverage.
Interactive Example 1: A company has Working Capital = $200,000, Total Assets = $2,000,000,
Retained Earnings = $400,000, EBIT = $300,000, Market Value of Equity = $1,500,000, Total Lia-
bilities = $1,000,000, Sales = $3,000,000. Calculate the Z-Score.
200,000
• Step 1 : X1 = 2,000,000 = 0.1.
400,000
• Step 2 : X2 = 2,000,000 = 0.2.
300,000
• Step 3 : X3 = 2,000,000 = 0.15.
1,500,000
• Step 4 : X4 = 1,000,000 = 1.5.
3,000,000
• Step 5 : X5 = 2,000,000 = 1.5.
• Step 6 : Z = 1.2(0.1) + 1.4(0.2) + 3.3(0.15) + 0.6(1.5) + 1.0(1.5) = 0.12 + 0.28 + 0.495 + 0.9 + 1.5 =
3.295.
• Interpretation: A Z-Score of 3.295 (> 2.99) indicates financial stability. Monitor X1 (liquidity)
for potential improvement.
2 Beneish M-Score
Beneish M-Score detects earnings manipulation using eight financial ratios:
1
, BS2203 Financial Analysis Multi-Media University
• Formula: M = −4.84 + 0.92 · DSRI + 0.528 · GMI + 0.404 · AQI + 0.892 · SGI + 0.115 · DEPI −
0.172 · SGAI + 4.679 · TATA − 0.327 · LVGI, where:
– DSRI = Days Sales in Receivables Index.
– GMI = Gross Margin Index.
– AQI = Asset Quality Index.
– SGI = Sales Growth Index.
– DEPI = Depreciation Index.
– SGAI = Sales, General, and Administrative Expenses Index.
– TATA = Total Accruals to Total Assets.
– LVGI = Leverage Index.
• Interpretation: M > -1.78 suggests manipulation; M < -1.78 indicates low risk.
Insight: High M-Scores may reflect aggressive accounting; focus on DSRI and TATA for red flags.
Interactive Example 2: A simplified M-Score calculation uses DSRI = 1.2, GMI = 1.1, AQI = 1.0,
SGI = 1.3, DEPI = 1.0, SGAI = 1.0, TATA = 0.05, LVGI = 1.0. Calculate the M-Score.
• Step 1 : M = −4.84 + 0.92(1.2) + 0.528(1.1) + 0.404(1.0) + 0.892(1.3) + 0.115(1.0) − 0.172(1.0) +
4.679(0.05) − 0.327(1.0).
• Step 2 : M = −4.84+1.104+0.5808+0.404+1.1596+0.115−0.172+0.23395−0.327 ≈ −1.74165.
• Interpretation: An M-Score of -1.742 (< -1.78) suggests low manipulation risk. Monitor DSRI
(1.2) for potential receivables issues.
3 Free Cash Flow (FCF) Tools
FCF measures cash available after operating and capital expenses, used for valuation and performance:
• Formulas:
– FCF to Firm (FCFF) = EBIT(1 - Tax Rate) + Depreciation - Change in Working Capital
- Capital Expenditures.
– FCF to Equity (FCFE) = Net Income + Depreciation - Change in Working Capital -
Capital Expenditures + Net Borrowing.
• Forecasting: Project revenues, expenses, and investments; adjust for economic conditions (e.g.,
highlights FCFs role in performance).[](https://pmc.ncbi.nlm.nih.gov/articles/PMC10281586/)
Insight: Positive FCF supports growth and debt repayment; negative FCF may signal operational
issues.
Interactive Example 3: A company has EBIT = $500,000, Tax Rate = 30%, Depreciation =
$100,000, Change in Working Capital = $50,000, Capital Expenditures = $150,000. Calculate FCFF.
• Step 1 : EBIT(1 - Tax Rate) = 500, 000 × (1 − 0.3) = $350, 000.
• Step 2 : FCFF = 350, 000 + 100, 000 − 50, 000 − 150, 000 = $250, 000.
• Interpretation: FCFF of $250,000 indicates cash available for all investors. Forecast future FCF
using revenue growth and cost trends (e.g.,).[](https://pmc.ncbi.nlm.nih.gov/articles/PMC10281586/)
BS2203 Exam Forecasting and Risk Indicators
This exam tests BS2203 skills in Z-Score, M-Score, and FCF tools. It includes 30 questions: 20
multiple-choice (2 marks each, 40 marks), 5 calculation (4 marks each, 20 marks), and 5 analysis (4
2
