Exam 10: Credit Analysis

Liquidity is viewed as a company's ability to meet its short-term and long-term obligations.

A decrease in provision for doubtful accounts relative to gross accounts receivable could indicate improved collection of accounts receivable or it could indicate that management has failed to make adequate provisions for non-collectible accounts.

Consider each of the following situations independently of each other. For each of the situations provide one example of when the underlying circumstances may be such that the observed trend is unfavorable and one example of when the underlying circumstances are favorable. a. Current ratio increases from one period to the next b. Accounts receivable turnover increases from one period to the next c. Accounts payable turnover increases from one period to the next

The short-term liquidity of a company:

Selected ratios for Hurtal Corporation for year ended Year 1 are: Debt-to-equity 0.8 Times interest earned 3.0 Current ratio 1.2 Cash flow to fixed charges 2.8 Below is a set of transactions that are not reflected in the ratios above. Consider each transaction independently and indicate its effect on the above ratios. Explain your answer. 1. Decrease in tax rate for Year 1 2. Issued $1,000 in common stock to repay $1,000 of long-term debt at beginning of Year 1. 3. Useful life of depreciable assets was increased at beginning of Year 1.

Sellograph Corporation reports sales of $10 million for Year 2, with a gross profit margin of 40%. 20% of Sellograph's sales are on credit. Year 1 Year 2 Accounts receivable \ 150,000 \ 170,000 Inventory 900,000 1,000,000 Accounts payable 1,100,000 1,200,000 -Accounts receivable days outstanding at the end of Year 2 is closest to:

When calculating the times interest earned, adjustments should normally be made for existence of operating leases. A portion of rental payments should be reclassified as interest.

A leveraged buyout is when a group of investors use equity to buy a highly leveraged company that is in distress, and pay down the debt using their equity.

ABC Company is planning a major expansion for which it needs $5 million in external funding. It has various options as how to finance this expansion. Which of the following is correct?

Which of the following statements is correct with respect to the times interest earned ratio? I. It is independent of operating income. II. It is independent of the interest rate paid on debt. III. It is independent of the tax rate. IV. It is independent of the amount of dividends paid.

If a company's days receivables outstanding increases, this could be an indication that there are problems with the quality of the company's products.

All other things being equal, which of the following actions will achieve a company's wish to increase its financial leverage? I. Repurchase stock II. Issue more dividends III. Sell accounts receivable at face value IV. Split stock 2 for 1

Which of the following industries would you expect to have the highest inventory turnover?

When examining the debt to equity ratio of a company, consideration should be given to pension liabilities. Specifically, it should be determined if the projected benefit obligation significantly exceeds the plan assets and if it does compare this to any liability recorded on balance sheet.

A company's return on assets will equal its return on equity if there is no debt.

All current assets, by definition, will result in cash inflows within the next year or operating cycle whichever is longer.

All other things being equal, the greater the variability of sales, the higher the earnings coverage ratios are.

Following are Dell's condensed consolidated statement of financial position and condensed consolidated statement of operations, in millions (unaudited). a. Assume all net revenue are from credit sales. Using the above information, calculate the following ratios for FY05 to FY02: 1. Current ratio 2. Quick ratio 3. Working capital 4. Days' sales in accounts receivable 5. Days' sales in inventory 6. Days' purchases in accounts payable 7. Net days' working capital 8. Long-term debt to assets ratio 9. Total debt-to-equity ratio 10. Total liabilities to total assets Note: Use average inventory, average accounts receivable, and average accounts payable in the calculation of days' sales in inventory, days' sales in accounts receivable, and days' purchases in accounts payable respectively. b. Comment on the changes to Dell's liquidity risk c. Comment on the changes to Dell's solvency risk

Below is information for year ended 12/31/05 for Company A and Company B. Company A Company B Interest expense \ 400 \ Tax expense (40\%) 400 400 Net income 600 600 Total assets -12/31/05 10,000 10,000 Total debt 5,000 0 Equity 5,000 10,000 -Financial leverage ratio for Company A and B for 2005 are: Company A Company B A) 2.00 0.0 B) 1.00 0.0 C) 0.70 0.6 D) 0.50 1.0

The earnings to fixed charges ratio: