Exam 10: Credit Analysis

An increase in the current ratio due to increased inventory and receivables could be consistent with a recession in the economy.

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

Problem Eight: Effect of Interest Rate Changes on Leverage 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/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?

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 receivable days outstanding at the end of Year 2 is closest to:

You are calculating the earnings to fixed charges ratio for a company. Which of the following is incorrect?

Selling accounts receivable increases which of the following?

A primary motivation for a company financing its business activities through debt is not

The higher the company's inventory turnover the better is company.

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

Debt may contain sinking fund provisions. This means that bond is insured by government and that in the event of default on the debt the government will sink into its funds in order to honor the debt.

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

A company has significant uncapitalized operating leases. This company has positive net income. If these were capitalized the effect on the following ratios would be: Times interest earned Debt/equity ratio A) Increase Increase B) Increase Decrease C) Decrease Decrease D) Decrease Increase

Simmons Company is in a high growth industry. You are examining its long-term solvency and notice that they have significant deferred tax liabilities. Upon further examination of the tax footnote you find that virtually all of the deferred tax liabilities are due to plant and equipment. For purposes of analysis the deferred tax liability should be treated as:

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

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

Two companies, A and B, both have $1million in assets, net income before interest and taxes (EBIT) of $160,000, and the same tax rate. Company A is all equity financed and B is 50% debt financed and 50% equity financed. If B's pre-tax cost of debt is 8%, then Company A will have a ROA that is ____ and a ROE that is _______ than B's. A's ROA A's ROE A) higher same B) higher higher C) same same D) same lower

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

Company A capitalized $100 in interest costs during the year. Times interest earned ratio, after necessary adjustments, for Company A is:

Problem Seven: Consolidation vs. Equity 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/equity ratio b. Return on assets c. Times interest earned

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