Exam 10: Credit Analysis

The higher the cash to current liabilities ratio of a company, the more liquid is the company.

Which of the following statements is true? I. Pretax cost of debt is generally higher than the pretax cost of equity. II. Interest is tax deductible. III. Preferred dividends are tax deductible. IV. Total cost of capital is always greater than or equal to cost of equity.

"Trading on the equity" means that a company is publicly traded as opposed to being closely held.

Liquidity is generally measured by a company's ability to pay its short-term obligations using its short-term assets.

Which of the following is not likely to be the cause of a company's low accounts receivable turnover?

Determination of short-term liquidity is important to both investors and creditors.

Capitalization of interest results in an understatement of the times interest earned.

For purposes of long-term solvency analysis, the calculation of balance sheet ratios such as debt to equity or debt to total capital are of limited value and are used mostly as screening mechanisms to indicate whether further analysis is warranted.

If a firm capitalizes a lease instead of treating the lease as an operating lease, the effect on the current ratio and the debt-to-equity ratio will be: Current ratio Debt-to-equity ratio A) Increase Increase B) No effect Increase C) No effect Decrease D) Decrease Increase

In assessing the quality of receivables it is important to consider the revenue recognition methods used by a company.

Which of the following transactions or events would have no immediate effect on the times interest earned ratio but will cause debt to equity ratio to decrease?

Which of the following best describes the current ratio?

Deferred tax assets should be deducted from the assets and equity, if they are not expected to reverse.

While screening hundreds of companies for investment opportunities, you come across Apex Corp. It is rated AA by the major rating agencies and has a low Altman's Z-score of 1.15. You want to do detailed analysis, but you preliminarily conclude:

One would expect restaurants to have lower inventory turnover than general merchandise stores.

Altman's Z-score uses multiple discriminant analysis in a bankruptcy prediction model.

Imagine FASB passes a new rule that required the capitalization of R&D. The effect for a drug company would be to:

All other things being equal, if a company increased its dividend payments, what would happen to the following ratios? Sotal debt to equity Times interest earned Financial leverage ratio A) Increase Same Same B) Same Same Decrease C) Increase Decrease Decrease D) Same Increase

Financial ratios are often used in models that predict financial distress.

Which of the following does not represent future expected cash inflows?