A firm knows that it will go bankrupt if it loses more than £10m on a project. The expected NPV is £16m, with a standard deviation of £13m. What is the Z- factor of the bankruptcy event?
A) +2
B) +7.5
C) - 2
D) - 0.31

Question

Quizplus · Accepted Answer

To calculate the Z-factor, we need to use the following formula:

Z = (W - E[NPV]) / σ[NPV]

where W is the worst-case scenario (i.e. losing £10m), E[NPV] is the expected NPV (£16m), and σ[NPV] is the standard deviation (£13m).

Substituting the values: 
Z = (-10 - 16) / 13 
Z = -2/13

Therefore, the Z-factor of the bankruptcy event is -2/13 or approximately -0.31.

The closest option is C, which is -2.

A Firm Knows That It Will Go Bankrupt If It