A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default probability.

Question

BlackTom AI · Accepted Answer

The question asks you to evaluate a statement about the Altman Z-score and loan permission decisions.
Option 1 (True): The claim that a Z-score of 3.15 means the company should not be granted a loan due to high default probability is not accurate. In Altman’s model, higher Z-scores indicate lower default risk, with scores above around 3 generally considered indicating a safe or non-distress company. Therefore interpreting 3.15 as a high default probability is incorrect.
Option 2 (False): A Z-score of 3.15 falls into the range suggesting low likelihood of default, implying the borrower is relatively creditworthy relative to the distress zones. The standard interpretation is that higher Z-scores correlate with stronger credit health, so denying a loan on the basis of a high default probability would be contrary to what the Z-score signifies. This reasoning hinges on recognizing that the Z-score scales inversely with default risk: the higher the score, the lower the risk.
Option 3 (If considered): Some may wonder about the “too high” or “edge” cases, but typically a Z-score around 3.0 is not associated with high default probability; rather, it suggests stability or modest strength in financials. Misconceptions arise when one confuses the threshold bands or misinterprets the scale direction.
Option 4 (Additional nuance): While the Z-score is informative, loan decisions should also incorporate other factors (cash flow, collateral, industry risk, macro conditions). Relying solely on the Z-score could overlook context, but it does not change the basic interpretation that 3.15 does not indicate a high default probability.

FINS5530-Financial Institution Mgmt - T3 2025

A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default probability.

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