Exam 10: Credit Analysis

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

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

A joint venture may result in significant liabilities that are not recorded on the balance sheet of the parent company.

If a company sells its receivables this is an indication that it has very high quality receivables.

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

The SEC requires disclosure if fixed charges exceed earnings.

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

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

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

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.

Which of the following is not likely to be used to measure a company's liquidity?

The lower equity is as a proportion of total capital, all other things equal, the greater the risk borne by the other providers of capital.

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.

An increase in the credit days offered to customers by a company will improve the company's financial situation because of the likely increase in sales.

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

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 Z-score. You want to do detailed analysis, but you preliminarily conclude

Sellograph Corporation reports sales of $10M 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 payable days outstanding at the end of Year 2 is closest to:

The higher the company's cash to current liabilities ratio, the better is the company.

Companies in certain industries do not make the distinction between current and non-current on their balance sheets.