Chapter 10 – Credit Analysis and Distress Prediction
Quiz
Which of the following industries is the least debt intensive industry?
Pharmaceutical industry
Air transportation industry
Electric services industry
Hotel industry
Consider the following statement: “Large firms tend to have higher leverage than small firms because they have lower business risks (on average).” This statement is
True
False
Multiple bank borrowing is
Most common in countries with strong legal protection of creditors.
Most common in countries with weak legal protection of creditors.
Not associated with the degree of legal protection of creditors.
Supplier financing is
Most common in countries with strong legal protection of creditors.
Most common in countries with weak legal protection of creditors.
Not associated with the degree of legal protection of creditors.
Consider the following statement: “One mechanism that commercial lenders use to reduce credit risk is to lengthen the maturity of the loans they extend.” This statement is
True
False
In cases where a borrower’s cash needs are difficult to anticipate, it is most likely to make use of
Term loans
Lease financing
Open lines of credit
Mortgage loans
Which of the following types of collateral is generally the most desirable form of security?
Inventory
Real estate
Equipment
Receivables
None of the above
Consider the following information about company A’s performance and financial position in year t:
Company A’s fund flow coverage ratio in year t equals
4.00
3.80
3.60
2.98
Which of the following is not a financial covenant that is commonly used in loan contracts?
Maintenance of a minimum fund flow coverage ratio
Maintenance of a maximum ratio of total liabilities to net worth
Maintenance of a minimum return on assets
Maintenance of a minimum net working capital balance
Consider the following statement: “The number of European firms that receives an ‘A’ rating typically exceeds the number of European firms that receives an ‘AA’ rating.” This statement is
True
False
Which of the following variables is positively associated with a firm’s debt rating?
Net debt to net capital
Firm size
NOPAT to net capital
A, B and C
B and C
Company X has a significantly lower Altman Z score than company Y. This implies that
Company X’s bankruptcy probability exceeds company Y’s bankruptcy probability
Company Y’s bankruptcy probability exceeds company X’s bankruptcy probability