CFI CBCA Account Monitoring and
Warning Signs Study Questions
Establishing Early Warning Signals for Corporate Clients
Signals must: - ANSWER 01. Be client-specific - choose an event based on the
client's business operations
02. Be measurable - you can easily measure whether the event has occurred
01. Be monitorable - you can easily monitor the chosen signals using the
information you receive 04Trigger action - first action should be to contact the
client
Establishing Early Warning Signals for Corporate Clients
Examples: - ANSWER Loss of one or more major customers
Heavy reliance on short-term debt
Appearance of other lenders
Loss of key product lines, distribution rights, or supply source
Violations of loan covenants
Predictive Default Models
Session Objectives - ANSWER -Evaluate the drivers behind Altman's Z-score
model
-Evaluate the drivers behind the EDF prediction model
Predictive Models - ANSWER Altman's Z-score Model
The EDF Model
, Altman's Z-Score Model - ANSWER Uses Financial Ratios
-Model is based on financial ratios originally developed by Edward Altman.
Measures divergence
-Developed on the basis of divergence in ratios.
• Non-bankrupt companies
• Companies that fail
Applicable for All Businesses
-Model originally made for public manufacturing firms and then modified for all
businesses.
X1, X2, X3, X4, X5 - ANSWER X1 Working Capital / Total Assets
X2 Retained Earnings / Total Assets
X3 EBIT / Total Assets
X4 Market Value of Equity / Book Value of Total Liabilities
X5 Sales / Total Assets
Working Capital = Current Assets - Current Liabilities Retained Earnings = Total
Reinvested Earnings / Losses
EBIT = Earnings Before Interest and Taxes (Operating Profit)
Market Value = Market Value of Common Stock and Preferred Equity
Z_Original = 1.2(𝑥1 )+1.4(𝑥2 )+3.3(𝑥3 )+0.6(𝑥4 )+0.999(𝑥5 ) - ANSWER above
2.99 predicted as non-fail.
Warning Signs Study Questions
Establishing Early Warning Signals for Corporate Clients
Signals must: - ANSWER 01. Be client-specific - choose an event based on the
client's business operations
02. Be measurable - you can easily measure whether the event has occurred
01. Be monitorable - you can easily monitor the chosen signals using the
information you receive 04Trigger action - first action should be to contact the
client
Establishing Early Warning Signals for Corporate Clients
Examples: - ANSWER Loss of one or more major customers
Heavy reliance on short-term debt
Appearance of other lenders
Loss of key product lines, distribution rights, or supply source
Violations of loan covenants
Predictive Default Models
Session Objectives - ANSWER -Evaluate the drivers behind Altman's Z-score
model
-Evaluate the drivers behind the EDF prediction model
Predictive Models - ANSWER Altman's Z-score Model
The EDF Model
, Altman's Z-Score Model - ANSWER Uses Financial Ratios
-Model is based on financial ratios originally developed by Edward Altman.
Measures divergence
-Developed on the basis of divergence in ratios.
• Non-bankrupt companies
• Companies that fail
Applicable for All Businesses
-Model originally made for public manufacturing firms and then modified for all
businesses.
X1, X2, X3, X4, X5 - ANSWER X1 Working Capital / Total Assets
X2 Retained Earnings / Total Assets
X3 EBIT / Total Assets
X4 Market Value of Equity / Book Value of Total Liabilities
X5 Sales / Total Assets
Working Capital = Current Assets - Current Liabilities Retained Earnings = Total
Reinvested Earnings / Losses
EBIT = Earnings Before Interest and Taxes (Operating Profit)
Market Value = Market Value of Common Stock and Preferred Equity
Z_Original = 1.2(𝑥1 )+1.4(𝑥2 )+3.3(𝑥3 )+0.6(𝑥4 )+0.999(𝑥5 ) - ANSWER above
2.99 predicted as non-fail.
