Question

1. a) How is the accuracy of macroeconomic forecasting related to the uses of projected financial statements?

(b) What is the important aspect of financial flexibility for which projections are indispensable? Explain.

2. a) What do financial statements tell about a borrower’s ability and willingness to repay a loan?

b) What are some of the reasons why analyzing a company’s financial statements may not be sufficient to determine its credit quality?

Answer 1

1.

a) Macro economic factors are the one which are extenal factors but do have significant impact on he decision making expext of the business. for eg, there is change in technology the company is currently using as compare to the new one adopte dby competitors, or change in the current law of the state affecting the fundamental practices of the business. Thus as much the macroecononic factors are forecasted accurately the projected financial will be less impacted

b) Financial Flexibility refers to coping up with the uncertain expenditure or with unexpected investment opportunity not at all expected. Thus having some funds for the contingencies and opportunities which may arise in future will have positive impact on the performance.

2

a) The financial ratios are important and plays crutial role in determining the liquidity and the repayment ability of the borrower. Liquidity ratio such as current ratio, acid test ratio, etc helps to analyse the liquidity of fund available with the borrower where as Coverage ratio such as debt service coverage ratio or interest coverage ratio are used in order to determine the repayment ability of the borrower.

b) There may be certain qualitative aspects such as the credibility of the person in market, moral grounds, past records, person taking garuntee on his behalf, etc are the factors to be considered apart from financial ability.