We know that forecasts based on average values are on average wrong. In addition deterministic models will miss the important dimension of uncertainty – that gives both the different risks facing the company and the opportunities they produce.
Traditionally, when estimating costs, project value, equity value or budgeting, one number is generated – a single point estimate.
Most companies have some sort of model describing the company’s operations. They are mostly used for budgeting, but in some cases also for forecasting cash flow and other important performance measures.
Calculating Wacc for a company for a number of years into the future is not a trivial task. Wacc is no longer a single value, but a time series with values varying from year to year.
A good metric should have a low probability of rejecting a true hypothesis of bankruptcy (false positive) and a high probability of rejecting a false hypothesis of bankruptcy (false negative).
The Z-score formula for predicting bankruptcy was developed by E. Altman. The score is not intended to predict when a firm will file for bankruptcy, It is a measure of how closely a firm resembles other firms that have filed for bankruptcy.