Question

1. When assessing a company's credit risk:

Multiple Choice

• Analysts use only financial ratios and do not need to review the statement of cash flows.

• Analysts use only the statement of cash flows.

• Both liquidity and solvency must be reviewed.

• The assessment involves looking only at the operating and cash conversion cycles.

2.The accounts receivable turnover ratio

Multiple Choice

• is not useful in determining changes in customer payment patterns.

• uses total sales and not just credit sales in the computation.

• is computed using net credit sales and average accounts receivable.

• is computed using net credit sales and ending accounts receivable.

3.Solvency refers to:

Multiple Choice

• short-term ability to fund the company's operating needs.

• long-term ability to generate cash to for plant capacity needs and to fuel growth.

• long-term ability to generate sufficient cash to satisfy plant capacity needs, fuel growth, and to repay debt when due.

• the company's ability to generate sufficient cash to repay debt when due.

4.With respect to financial ratios:

Multiple Choice

• There may be accounting distortions which require the analyst to get "behind the numbers".

• There is only one correct way to compute many financial ratios.

• Analysts make adjustments in computing financial ratios only for industry practice.

• Financial ratios give analysts the answers they are searching for.

5.Which of the following is not a valid statement?

Multiple Choice

• Competitive ceiling is the rate of return that would be earned in the economist’s "perfectly competitive" industry.

• Companies that consistently earn rates of return above the floor are said to have a competitive advantage.

• Competition in an industry continually works to drive down the rate of return on assets toward the competitive floor.

• Rates of return that are higher than the industry floor stimulate more competition as existing companies innovate and expand their market reach or as new companies enter the industry.

6.In the highest-risk Standard & Poor’s rating category that is a CCC/C rating, more than half of the firms default within a year.

True or False

Answer 1

1-

A) This statement is incorrect as analysts not only use financial ratios but alsoneed to review the statement of cash flows.

B)This statement is incorrect as analysts use both the informations i.e. cash flows and ratios.

C)This statement is correct as both liquidity and solvency must be reviewed.

D) This statement is incorrect as it doesnt involves looking at the operating and cash conversion cycles

2-

A) Incorrect- It is not useful in determining changes in customer payment patterns as it provides only the period of the payments usually the customer do

B)Incorrect-Total sales is not used in the computation of accounts receivable ratio,only net credit sales is required.

C)Correct-The formula for accounts receivable ratios is computed using net credit sales and average accounts receivable

D) Incorrect-No Ending accounts receivable is not used but average accounts receivable is used to compute.

3-

A)Incorrect- Solvency does not refers to short-term ability to fund the company's operating needs as it refers to long term ability.

B)Incorrect- Solvency refers to the company's ability to generate sufficient cash to repay debt when due not refers to generate cash to for plant capacity needs and to fuel growth.

C)Incorrect- Solvency does not refers to generate sufficient cash to satisfy plant capacity needs, fuel growth,as it only refers to repay debt when due.

D)Correct-Solvency refers to the company's ability to generate sufficient cash to repay debt when due.

4-

A)Incorrect-There may not be accounting distortions which require the analyst to get "behind the numbers

B)Incorrect- There are many ways to compute many financial ratios

C)Incorrect-Analysts make adjustments in computing financial ratios not only for industry practice but for every type of users.

D)Correct-Financial ratios give analysts the answers they are searching for, as it is used for comaprison purpose and determined from a company financial information.

5-D)This is not a valid statement i.e. rates of return that are higher than the industry floor stimulate more competition as existing companies innovate and expand their market reach or as new companies enter the industry.However rates of return that are higher than the industry stimulate less competition.

6- True, this statement is correct,.In the highest-risk Standard & Poor’s rating category that is a CCC/C rating, more than half of the firms default within a year,because it represents a highly risk bond.