Exam 10: Credit Analysis

Which of the following items would not typically be included in the components of the current ratio?

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 -Days in inventory at the end of Year 2 is closest to:

Using LIFO rather than FIFO in a time of rising prices: I. lowers the current ratio. II. increases inventory turnover. III. increases profit margin. IV. increases debt to equity ratio

Management's Discussion and Analysis provides information that is useful in helping assess a company's liquidity.

Assume that Company ABC issues $20 million in long-term debt at par when interest rates were low, and Company DEF issued $20 million in long-term debt at par when interest rates were high. Assuming that interest rates remain high: a. Which company will have the higher debt to capital ratio (assume no other debt and identical equity)? b. ABC's debt matures in 18 months and DEF's debt matures in 9 years. What would be the effect on your analysis?

If a company has a current ratio greater than one then there is no chance it will go bankrupt in the next year.

When examining the current ratio and trends in the current ratio, it is important to evaluate the turnover rate of current assets and current liabilities and trends in these turnover ratios.

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 -Return on assets for Company A and B for 2005 are: Company A Company B A) 5\% 5\% B) 8.4\% 6\% C) 14\% 6\% D) 10\% 10\%

Company ABC has a large, wholly owned consolidated finance subsidiary. For each of the following ratios, state the effect (higher, lower, or no effect) that consolidation has on the ratio of Company ABC compared to the ratio it would have if it accounted for its finance subsidiary using the equity method. Briefly explain why each effect occurs. a. Debt to equity ratio b. Return on assets c. Times interest earned

If a company's current ratio increases from 1.1 to 1.3 from one year to the next, it can be concluded that:

Which of the following increases when accounts receivable is sold?

Which of the following will not affect the calculation of leverage ratios?

If a company wishes to increase its current ratio, it could:

Dividends on preferred stock with characteristics of debt such as mandatory redemption, fixed maturity or sinking fund must be tax-affected and treated as debt for calculation of common stock dividend coverage.

Guaranteed debt of unconsolidated subsidiaries should generally be ignored when analyzing the long-term solvency of a parent company, as subsidiaries are separate legal entities.

Liquidity depends to a large extent on prospective cash flows and to a lesser extent on the level of cash and cash equivalents.

All other things being equal, the lower the equity as a proportion of total capital, the greater the risk borne by the other providers of capital.

Which of the following is true of debt covenants? I. Limit the issuance of additional debt senior to the obligation. II. Specify minimum levels of selected financial ratios. III. Specify minimum levels of earnings coverage. IV. Prohibit excessive dividends or stock repurchases.

Debt financing is always better than equity financing because the interest on the debt is tax deductible, whereas dividends are not tax deductible.

Analysis of profitability of a company is more important when considering short-term liquidity than when considering long-term solvency of a company.