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Finance and Risk Assessment Quiz
Test your knowledge on various funding methods, credit risk analysis, and key financial metrics with our comprehensive quiz.
Designed for finance enthusiasts, this quiz covers:
- Debt and equity financing
- Credit risk exposure
- Profitability and liquidity analysis
What form of funding below would not be classified as a debt obligation
Senior, secured, short-term bank loan
Non-voting equity shares
Bonds with warrants
D) Private placement notes
What form of funding below is classified as debt?
Short-term bridge loan for acquisition purposes
Cumulative preferred stock
Voting equity shares
Stock options issued to employees
What is a primary purpose for the proceeds from debt issuance?
Show employees and contractors it has resources to meet expenses
Finance the purchase of plant, property and equipment
Increase the amount of cash reserves on balance sheet for comfort for shareholders
Prove to creditors and suppliers it has access to debt markets
Which type of credit exposure would be deemed to be the riskiest based on expected and unexpected loss
180-day unsecured commercial paper debt
5-year unsecured, junior debenture (bond)
60-day bank loan secured by cash reserves
2-year revolving credit facility secured by blanket lien on assets
In a liquidation scenario, in most jurisdictions, which form of funding will likely be the last of this group to be paid out from proceeds of asset sales?
Equity shareholders
Suppliers and vendors
Subordinated-debt holders
Unsecured bank lenders
In a liquidation, in most jurisdictions, which form of funding will likely be paid out from asset-sale proceeds before all others?
Subordinated-debt holders
Preferred-stock shareholders
Bank lenders secured by lien on plant and equipment
Unsecured corporate bond investors
Exposure at default in deriving Expected Loss is
Sum of all bank revenues from business activities with the borrower
Sum of all credit lines bank or investor has with borrower
The expected or scheduled loan outstandings with borrower at the time of default
The aggregation of all undrawn credit lines the bank has with borrower
In credit-risk analysis, the product of (Probability of default x Loss Given Default x Exposure at Default) is equal to
The unexpected loss in a loan portfolio
The unexpected loss for a specific loan
The expected loss of a specific loan transaction or a loan portfolio
The expected loss on market risks on a bank’s balance sheet
The Loss Given Default on credit risks and exposures will increase
If the lender or investor, unsecured, requires the borrower to pledge collateral immediately
If the lender or investor agrees to return collateral or release liens on collateral
If the lender or investor restructures the loan from subordinated debt to a senior lending position
If the lender or investor purchases any hedges (CDS insurance) it has on the credit risks from the exposure
An analyst’s financial analysis of the borrower will be a significant factor in determining
The default probability of the borrower used in determining expected loss in the transaction
The next planned board meeting of directors at the company
Next quarter’s operational strategy at the company
The company’s budgeting of costs for the next 12 months
What step below would reduce the Loss-Given-Default on a debt transaction:
Refinance the outstanding loan under the same terms
Request less collateral or release some pledges
Request a guarantee from a stronger parent or sponsor
Agree to accept a higher interest rate by becoming a subordinate investor
Which agency credit rating below would imply the lowest probability of default for the borrower?
C-
CC
CC+
BBB+
Which tenor category below would lead to the lowest probability of default for a given credit rating?
30-day borrowings, rolled over at discretion of lender
6-month loan
5-year loan
10-year unsecured loan
Which credit exposure below would result in the highest probability of default for the borrower?
A-rated exposure, 1-year tenor
BB-rated exposure, 2-year tenor
C-rated exposure, secured, 3- year tenor
BB+-rated exposure, 3-year tenor
Which transaction below would likely result in the lowest loan pricing or debt yield?
AAA-rated exposure, 1-year tenor
CC-rated exposure, unsecured, 3-year tenor
A-rated exposure, unsecured, 2-year tenor
BBB+-rated exposure, unsecured, 2-year tenor
In project finance, in what phase will there likely be peaking and positive cash flow from operations?
Ramp-up phase
Negotiation and strategy-formation phases
Construction and completion phases
Operating phase
In a project financing, during the construction phase, lenders to the project rationalize exposure during this period based on
The project generating substantial positive operating cash flow during ramp-up
The project being delayed because of unexpected costs and labor strikes
Cash proceeds from equity investors, expected refinancing of debt from long-term permanent investors, and collateral pledges
The number of experienced contractors involved in the project
In the business-industry Porter Model, if a company has bargaining influence with its customer base, what may be the likely result?
Such leverage may lead to casual pricing goods in whatever manner to maintain market share
Such leverage may lead to power in setting pricing of goods and, therefore, and higher profit margins
Such leverage may encourage customers to enhance their relationship with the company
Customers will have many alternatives and will go elsewhere
Private companies in the new-venture, start-up phase in a new industry are less likely to rely on which form of long-term financing?
Senior secured bank debt
Public issuance of 10-year corporate bonds
Private-placement debt with warrants
Private equity capital
Which process best explains the concept of the asset-conversion cycle?
The conversion of intangibles such as patents and copyrights into cash
The conversion of aged plant and equipment into cash
The exchange of investment in a subsidiary into the stock of a company that acquired the investment
The conversion of raw materials into inventory into receivables and cash
Which rating below is classified as investment grade?
CCC+
C-
BB-
A-
Which item below would be classified as “off-balance-sheet” risk?
Deferred tax asset
Deferred tax liability
A forward, contractual commitment to purchase a fixed asset
Value of patents
In profitability analysis, when the CGS/Sales ratio is declining from period to period
The company is exhibiting sound control of costs
The company’s management of costs is spiraling out of control
The company is not properly managing the costs of supplies and raw materials
The company is focusing on costs of goods sold and not focused on other costs (sales, marketing and promotion)
The company’s ROE
Will decrease if the company’s CGS/Sales ratio declines
Will increase if the company’s SGA/Sales ratio declines
Will increase if the company prefers long-term debt vs. short-term debt
Will increase if the company’s Revenues/Avg.-Assets ratio declines
A company’s Return on Equity (ROE)
Will increase if the company avoids debt and fund itself entirely from equity
Will increase if operating costs decline, relatively to trends in revenues
Will decrease if it decides to take on more debt relative to equity
Will decline if the company’s asset-turnover (productivity) ratio is rising
As the NPAT/Sales ratio decreases, then the company
Is not managing operating costs and expenses as efficiently
Will still exhibit ample means to be able to manage debt obligations at any level
Will demonstrate sufficient liquidity on the balance sheet
Is indifferent to the amount of debt on the balance sheet
For analysts, EBITDA is useful as a metric because it measures:
The amount cash in reserves on the balance sheet
The amount of current liabilities on the balance sheet
The amount of cash available after allotments for capital expenditures
An approximation of operating cash flow before capital expenditures, debt service and tax obligation
As the company improves performance and earnings grow, if the company pays out a steady proportion in dividends and buys back shares, what happens to the level of equity capital?
Equity capital will grow at the same amount of earnings reported
The growth of equity capital will be restricted, or equity remain the same or even decline
The equity capital account remains the same no matter dividend-payout policy
Equity capital will grow at the same amount of increases on the balance sheet
An assessment of liquidity measures
The level of available cash and the ability to raise cash to pay down short-term obligations
The ability of a company to defer paying down debt obligations
The level of non-current assets on the balance sheet
The amount of short-term debt at statement date
�Working investment” (or “net working capital”) is measured as
(Cash + inventory) – (Payables + Accrued expenses)
(Inventory – Receivables) + (Payables – Expenses)
(Inventory + Accounts Receivable) – (Accrued Expenses + Accounts Payable)
(Accounts Receivable + Cash)/Short-term debt
What statement best describes Debt/Ebitda?
Debt/Ebitda estimates the minimum amount of time in years it will take to pay down all debt from operating cash flow?
Debt/Ebitda measures whether there is sufficient equity cushion on the balance sheet?
Debt/Ebitda measures the length of time in the asset-conversion cycle
Debt/Ebitda measures the amount of short-term debt on the balance sheet
Decreases in “Inventory Days on Hand” imply
The company cannot afford to fund inventory purchases
The company has much more cash on hand
The company is selling off inventory more quickly and managing inventory levels efficiently
The company has rising tax obligations
Which ratio below defines the “Current Ratio”?
Working Capital/Sales
Cash/(Accrued expenses + Accounts Payable)
Current Assets/Current Liabilities
(Accounts Receivable)/Current Liabilities
Which ratio below best describes one version of the quick ratio?
Cash/Current Liabilities
Current Liabilities/Working Capital
Cash/Tax-payables
Accounts receivable/Accounts payable
The permanent-growth impact on working investment implies the following
Working investment may rise during certain periods because of seasonal growth in sales
As the company grows to new levels, working investment will rise to new permanent levels
Working investment will remain the same regardless of the season
Working investment will rise because of change in the company’s accounting for inventory
If the measure of “Payables Days on Hand” decreases, this may imply
Suppliers and vendors are granting more lenient terms
Suppliers and vendors have concerns about the company’s financial soundness and, therefore, are becoming stricter with terms
Suppliers and vendors are not sure about the health of the company—whether it’s improving or deteriorating
Customers of the company are indifferent to the company’s condition
The concept of operating leverage measures
The impact of fixed costs when revenues are in decline
The impact of cost accounting as businesses evolve
The efforts of companies to distinguish between expenses vs. expenditures
The impact of LIFO vs. FIFO inventory accounting
In periods of downturn and a steady decline in revenues, a company with low fixed costs will be less vulnerable because
The company will be able to reduce quickly substantial variable costs
The company projects it will be able to negotiate away fixed costs
The company is confident it can sell the fixed assets related to fixed costs
The company expects variable costs to rise as revenues decline
Debt-service payments are the sum of the following:
Dividend payments + Equity buybacks
Non-cumulative preferred dividend payments + Interest payments
Interest payments on subordinated debt + Preferred dividend payments
Principal payments on debt + Interest payments on the same debt
Principal payments on debt + Interest payments on the same debt
0.7
1.3
12.4
3.2
A ratio of (EBITDA-CapEx)/(Principal payments + Interest expense) > 1.2 over each of the past five years suggests
The company cannot pay down principal reliably from year to year
The company has minimal tax obligations
The company is able to meet debt obligations and make capital expenditures without difficulty
The company’s interest rate on debt outstandings is very low
Which of the following does not represent off-balance-sheet risk?
Law suits and litigation with projected, but unlikely and unexpected settlements
Goodwill that arises from acquisitions
Contractual commitments to purchase new technology systems
Substantial deficits that exist in the company’s pension funds
A ratio of (EBITDA-Cap Ex)/(Principal payments + Interest expense + Lease payments + Preferred Dividends) < 1.0 in each of the past five years suggests
The company has little difficulty in making payments of fixed charges
Net operating cash flow is growing at a rate of at least 10% annually
The company’s operating cash flows cannot handle annual fixed charges related to funding
The company’s capital expenditures are declining from period to period
The analyst derives operating cash flow from earnings. Which one adjustment below is necessary to derive operating cash flow?
Add back depreciation expense to NPAT
Adjust revenues to account for domestic operations
Distinguish between revenues generated in one product line vs. another
Adjust for the quality of opinion from the accounting auditor
In generating cash flow from operations and secondary sources, for which category below does the company have discretion or an option not to pay out?
Payments to vendors and suppliers
Payments to employees
The payment of interest on senior debt
The payment of dividends to common shareholders
EBITDA is an approximation of cash flow and, therefore,
Has adjusted for changes in working investment
Equals net operating cash flow before tax payment
Requires adjustments to ensure the analyst derives the correct amount of operating cash flow
Accounts for the interest paid on all outstanding debt
Companies that have stable, sustainable operating cash flows can
Will more likely expand into risk ventures
Pay out all cash to shareholders regardless of immediate debt obligations
Often meet debt requirements in timely fashion with a cushion
Use the stable cash flows to extinguish all intangible assets on the balance sheet
In the analysis of parent companies, cash flows reported are based, in part, on
The parent company’s debt strategy, devised by the CFO
Cash dividends up-streamed to the parent company
The size of the parent company’s balance sheet
The total of investments in subsidiaries
Cash-flow derivation requires
Adjustments related to recent management changes
Adjustments related to changes in inventory
Adjustments related to the cash account on the balance sheet
Adjustments related to changes in business strategy
Leveraged financing usually applies to debt structures based on which metric below?
(Debt – cash reserves)/Equity < 3
Debt/EBITDA < 3
Debt/EBITDA > 6
Debt/(Net-operating-cash-flow) < 3
In a project financing, during the construction phase, which of the following is not a reliable source of pay back for debt that funds construction?
New equity investments from the lead equity investor and sponsors
Permanent financing, arranged to refinance old debt
Cash on the balance sheet, unencumbered, from initial equity investments
Positive and growing operating cash flow
In debt and loan markets, transactions that are considered by credit analysts to have few covenants (< 3 financial covenants) are conventionally called
Rapidly structured financings
Specially structured financing
�Covenant Lite”
Covenant Adequate
In a rising interest-rate environment, which balance sheet has greater amounts of interest-rate risks?
Debt/Equity = 4, with all debt issued within the past year at fixed rates
Debt/Equity = 2, with 20% of debt at floating rates, 80% at fixed rate
Debt/Equity = 4, with all debt issued at floating-rate interest
Debt = 0; the borrower has no debt and all equity
Which capital and balance-sheet structure below presents currency risks to borrower?
Yen borrowings funding Yen assets or investments
Euro borrowings funding Euro operations
Philippine peso borrowings funding assets domiciled in the United States
Sterling pound borrowings funding activities in the United Kingdom
For debt transactions and credit exposures, which of the following is typical of an event of default?
Failure to pay hire a new manager for a business line within 30 days of position opening
Failure to pay scheduled principal or interest payment when due
Failure to respond to correspondence from bank group within one day of receipt
Failure to convene quarterly meeting of company’s operating committee as scheduled
Which debt covenant below is an example of an “affirmative covenant”?
Total debt must not exceed $200 million
The borrower must submit audited financial statements to the bank group within 45 days of fiscal yearend
The borrower must not from pledging current assets to other banks
The borrower must not use cash reserves to repurchase convertible-bond debentures
Which secured loan transaction below would be deemed to be insufficiently “protected”?
Asset-based lending where loan value = 85, receivables value = 110
Loan to financial institution where loan value = 100, value of pledged sovereign securities = 125
Loan to energy company where loan value =400, value of pledged reserves = 800
Real estate loan where LTV (loan-to-collateral value) > 100%
Loan exposures rationalized by “asset-based lending” or “asset-conversion cycles” are
Loans that fund and are secured by current assets on the balance sheet, particularly inventory and accounts receivable
Loans financing investments in low-tax-rate regions
Loans financing repurchases of mezzanine, private-placement debt
Loans financing construction of headquarters buildings
On a company’s balance sheet, which form of capital structure is considered sound, adequate and optimal?
Short-term debt funding new business acquisitions
Short-term debt funding plant, property and equipment
180-day short-term debt funding 90-day asset-conversation cycles
Short-term debt funding illiquid assets
On a company’s balance sheet, which form of capital structure would be consider most fragile and less optimal?
10-year long-term debt funding a new warehouse
Three-year bank revolving credit funding working-capital needs
Five-year subordinated debt funding permanent levels of working investment
45-day short-term debt funding the purchase of a new factory
In debt pricing, investors and lenders offer pricing based on a risk-free rate plus a premium. The premium is often a function of
The lead bank of the transaction
The documentation requirements of the financing
The expected loss of the transaction
The number of debt investors participating in the transaction
For which transaction below will the bank demand the highest pricing because of risks?
Unsecured three-year loan
Unsecured 10-year bond issue
5-year senior, secured loan
3-year senior loan, secured by receivables and inventory
Which form of a guarantee from a third party is considered the strongest form (legally enforceable)?
Guarantee of ownership of the borrowing subsidiary
Guarantee that subsidiary will operate in one industry only
Oral letter of support
Written Guarantee of Payment at Default
In a debt structure, which of the following would be a financial covenant related to tangible net worth?
Minimum cash reserves = $750 million
Unencumbered cash/Current liabilities > 0.99
(Total assets – intangibles) minus total liabilities > $100 million
Long-term debt < $443 million
Which covenant below helps ensure the borrower maintains ample liquidity to meet certain current obligations?
Maximum Debt/Equity = 3.3
Minimum tangible net worth = $100 million
(Cash + Short-term investments)/(Current Liabilities) > 0.50
Debt/EBITDA < 6.0
Double leverage is the degree to which the holding company is using debt at the holding company to fund equity investments of the subsidiaries and is equal to
(Equity investments in subs)/(Equity of holding company)
(Equity investments in international subs)/(Equity of largest U.S. sub)
(Short-term debt at the holding company)/(Total debt in major operating subs)
(Equity in holding company)/(Equity of consolidated company)
Which transaction below will likely have the lowest expected loss—given the same level of debt exposure?
BB- borrower, unsecured, 3-year tenor, guaranteed by A-rated guarantor
A-rated borrower, senior, secured by marketable securities, 5-year tenor
A-rated borrower, unsecured, subordinated, 3-year tenor
BBB-rated borrower, unsecured, 3-year tenor
The LGD (and expected loss) is lowest for which transaction below?
Collateral received is possessory, perfected, and has a confirmed value that exceeds exposure by 25%
Collateral pledged is held without documentation by an irreputable, third-party custodian in another country
Collateral pledged has not been perfected based on legal filings in the right jurisdiction
Collateral pledged is valued at an amount 75% of the outstanding debt exposure
If the LGD (loss-given-default) for a certain exposure, loan or transaction is 55%, then the recovery rate is expected to be
80%
45%
43%
42%
Default probability for a particular borrower is based each of the factors below except:
Default frequencies for borrowers with the same credit rating
The type of collateral the borrower might be able to pledge
The maturity dates of the exposure, loan or risk under review
The debt investors’ outlook for the borrowers or the industry
The expected loss on a proposed transaction can be reduced by all of the following except:
Ensuring that all banks and debt-holders sign an inter-creditor agreement to ensure seniority
Agreeing to lend unsecured to a borrower rated CCC+
Considering shortening the tenor on the deal from 5 years to 1 year
Ensuring that collateral received has a market value that exceeds outstanding credit exposure
In projecting capital expenditures and revenues,
Projections should be based on the precise amount the company invested three years before the current year
Projections should be based on the growth in total assets in the most recent year
Projections should be based on previous CapEx/Rev ratios, projections of revenues, necessary expenditures to account for asset depreciation and the projected amount of new investments necessary to support projected revenue growth
Capital expenditures are not necessary to assess cash flows necessary for the amortization of debt
If debt capacity as measured by an analyst is less than current debt outstanding, then the company
Is required by accounting rules and other regulation to reduce outstandings with six months
May consider balance-sheet cash, refinancing options, and other secondary sources to manage debt obligations
Must seek advice from banks on what next steps are
Will see immediate increases in its share price
The discount rate in calculating debt capacity should be the interest rate tied to
The company’s cost of preferred equity
The company’s cost of issuing commercial paper
The company’s after-tax cost of long-term debt
A fixed Libor rate with no credit premium
Debt capacity at a company, based on projected cash flows, refers
The amount of debt the company can handle based entirely on the balance-sheet cash
The minimum amount of debt the company must borrow to satisfy shareholders
The amount of debt the company can amortize over a three-month time period
The maximum amount of debt the company can service from operations over a defined tenor
In projecting cash flows to assess debt service coverage and debt capacity, the analyst should
Project cash flows based on best-case scenarios
Project cash flows consistently with approaches from equity research analysts
Project cash flows conservatively and realistically, acknowledging for possible unexpected costs
Project cash flows based on management forecasts
As projected revenues increase, working investment will likely increase if the WI/Revenues ratio is projected to remain constant. In cash flows, working-investment adjustments will, therefore, show
Source of cash
No impact on projected cash flow
Immeasurable impact on cash flow
A use of cash to support WI increases
Which trend of ratios for SGA/Sales over a three-year period suggests the company’s SGA expenses will remain under control or possibly improve in the periods to come?
Case 1: 20%, 24%, 25%
Case 2: 17%, 15%, 12%
Case 3: 25%, 27%, 29%
Case 4: 15%, 22%, 17%
In projecting corporate taxes, one approach used by in analysis is to
Use the amount in deferred-tax liability accounts on the balance sheet
Examine the effective tax rates in income statements in previous years, company disclosures about tax guidelines and policies and any prospective changes in the tax code
Straightline the projection of taxes based on taxes paid in the most recent year
Ignore the cash outflow related to taxes
Which trend of ratios of CGS/Sales over a three-year period below suggests that CGS/Sales should be projected at 80%?
Case 1: 79%, 79%, 80%
Case 2: 90%, 95%, 90%
Case 3: 69% 70%, 70%
Case 4: 55%, 97%, 59%
A bottoms-up approach to projecting revenues
Applies a 5-10% per-annum growth rate to consolidated revenues
Projects revenues based on the country or government’s latest views of inflation
Analyzes the past and projected performance of each major business line and projects revenues for each and sums them to reach consolidated, projected revenues
Examines only business operations that have been profitable in each of the past five years
A top-down approach to projecting revenues
Starts by examining and computing average per-annum growth rates for revenues the past 15 years
Focuses on assessing the objectives and intents of activist shareholders
Examines the economy, product markets, capital markets and industry risks and apply them to consolidated results from recent years
Examines each business line and assesses its contributions to the consolidated performance
Which description describes a company and industry experiencing decline and possible disappearance?
Revenues across the industry and with the company start to decline quickly with little sign of an upturn until the company adapts and adopts new product strategies
Revenues will fluctuate as some customers choose to support an old company by boosting demand in the medium term
Revenues for the company will increase by amounts averaging 10%
Revenues will not decline, because equity researches will likely have overstated the potential decline in the industry
In projections, which scenario best describes forecasts prepared by management
Revenues, costs and operating cash flows are projected based projects supplied by equity-research analysts
Revenues, costs and operating cash flows are projected based on optimistic reports prepared by government regulators
Revenues, costs, and operating cash flows are projected based on optimistic, confident scenarios, often for the benefit of shareholders
Revenues and cash flows are projected based only on worst-case, scenarios
For companies that require significant research and development expenses to support growth, what rational approach should be considered for projections?
Project revenues on the basis that R&D expenses at a certain amount will result in an identical increase in the total of revenues
Project revenues on the basis of recent customer growth rates
Project revenues based on past track record, history, and timetables in past research efforts and based on expected product approvals, regulation, and product testing
Project revenues should grow at the same rate as the last reported year, regardless of R&D expenses
Which scenario below presents an acute warning signal in project finance?
Project contractors announce the project will be delayed another 18 months because of uncertainty about labor and related compensation
Project sponsors have decided to limit the number of equity investors in the project
A government body has introduced attractive tax credits related to the project
The company hires outside experts to perform an analysis of environmental issues and risks at the new project site
In projections, which scenario best describes the no-growth case?
Revenues and cash flows grow at a modest 10%/year pace thereafter
Revenues and operating cash flows decline from year to year
Revenues and operating cash flows fluctuate up and down in each succeeding year
Revenues, costs and operating cash flows remain flat in each year
Tangible net worth is equal to
Total shareholder equity minus fixed assets
Total liabilities minus goodwill
Total shareholder equity + long-term debt – cash reserves
Total shareholder equity minus (Goodwill + Intangibles)
Which practice below would be a warning signal or red flag in revenue recognition?
The company sells a product, buys it back, sells it again to the same customer and then buys it back and sells it to a third party (“round trips”)
The company performs services and is paid for them at the completion of the project timeline
The company receives payment up front for a product before it has been manufactured and reports the transactions as “deferred revenue”
The company sells inventory at a 5% mark-up from the cost
What special warning sign below is related to revenue recognition?
The company changes its method for accounting for inventory from FIFO to LIFO
The company manages credit risk of accounts receivable by reassessing credit terms with customers
The company prepays certain minor expenses, but has not yet expensed the items on the income statement
The company aggressively reports revenues for a product delivered before the product has been manufactured and a sales agreement has been prepared with the prospective buyer
Which scenario presents warning signs of concerns about the financial soundness of the company?
Company managers explain accounting methodology and standards for investments and depreciations thoroughly and clearly
Company managers announce losses in operations, but explain reasons clearly and respond with steps to return to profitability
Company managers explain the details in footnotes for a balance sheet item “Goodwill and Intangibles”
Company managers lump substantial amounts of assets into a “Miscellaneous Assets” category and elect not to explain the content of assets in audited financial statements.
Which scenario below presents a red flag or warning sign of potential trouble?
The company reduces cash reserves to finance growing amounts of inventory
The company postpones distributing auditing financial information and has difficulty in public disclosures explaining the cause of recent losses.
The company uses cash reserves to prepay certain overhead expenses
A portion of cash reserves are designated for future investments in the short term
A company can hedge against the rise in interest rates on existing floating-rate debt by
Deferring interest payments, if debt-holders do not respond
Ignoring interest-rate increases and plan for rates to fall
Entering into interest-rate swaps hedges with highly rated dealers
Appeal to ratings agency for a better rating
For companies in decline or stress, which debt-service coverage would lenders prefer to see?
DSCR (Net-operating-cash-flow/(Principal + Interest)) = 0.75
DSCR > 1.2
0 > DSCR > 0.8
DSCR = 0.999
Which of the following is not considered a primary source of cash in managing debt obligations?
Proceeds of the sale of a closed Indonesian subsidiary
The sale of advisory services and the ensuing collecting of related fees
The use of cash reserves on the balance sheet after customers pay receivables
The sale of inventory and the ensuing conversion into receivables and then cash
The derivation of cash flow from operations usually does not account for which of the following:
Adjustments to accounts payable
Net adjustments receivables
Adjustments to inventory changes
The company’s decision to issue new debt
If a company has negative operating cash flow, it can finance such a deficit by
Delaying payments to vendors
Issuing new equity
Repurchasing shareholder stock
Postponing payments of interest due on old debt
If a company has negative operating cash flow, to manage debt obligations prudently, it can
Expect debt-holders require immediate restructuring of all old debts
Consider secondary sources like asset sales or new issuances of corporate bonds
Request debt-holders will write off certain portions of the debt
Pledge intellectual properties as collateral to comfort debt-holders
A company paying consistent, steady dividends to shareholders can
Consider paying dividends to loyal debt-holders
Require shareholders to reinvest dividend payouts as debt in the company
Arrange to pay the dividends from a combination of new debt and operating cash flow
Elect to pay the dividend to investors who agree to buy shares in the future
In deriving operating cash flow, an increase in inventory is considered
An outflow of cash
An inflow of cash
To have zero impact on cash flow
No determinable impact on the derivation
In the derivation of operating cash flows, an increase in accounts payable is considered
To reflect supplier’s growing concerns about the health of the company
A positive adjustment to computing operating cash flows
A negative adjustment to account for higher expenses
An investment that has negligible impact on cash flows
Which case is the best example of “trapped cash flow”?
The company maintains cash reserves on the balance sheet to pay down short-term liabilities
The company prepays all advertising and marketing costs
The company holds operating cash flow in a foreign subsidiary to reduce tax obligations at the parent
The company holds onto cash that it could pay out to shareholders as dividends
In the derivation of operating cash flows, if the amount of taxes payable declines, then the change implies
A use of cash or a negative adjustment to cash flows
An increase in cash flows based on the change
No impact on the calculation of operating cash flow
A recent increase in corporate tax rates
In deriving operating cash flows, a net increase in accounts receivable between periods
Is a negative adjustment to derived cash flow
Is a significant sign of declining business at the company
Implies the company has negligible risk in collecting on receivables
Implies there are substantial customer defaults in receivables
Which performance measurement below will have accounted for net cash-outflow in capital expenditures during the period?
Net profit after taxes
EBITDA
Net profit before taxes
Net operating cash flow before debt-service payments
Which ratio below implies the company is not making cash capital expenditures sufficiently enough to account for wear and tear of fixed assets?
CapEx/Depreciation > 1.2
CapEx/Depreciation = 0.4
CapEx/Depreciation = 1.1
CapEx/Depreciation = 1.8
Which ratio suggests the company will likely require new investments and expenditures to support revenue growth?
Current Assets/Fixed Assets = 0.5
Debt/(Equity + Debt) = 50% on average the past five years
CapEx/Revenues = 10% in each of the past five years
NPAT > $50 million in each of the past five years
The fixed-charges coverage ratio assesses whether the company is generating operating cash flow to cover certain fixed payments each year. Which item below is normally included in the sum of fixed charges?
Interest payments
Dividend payments
Optional prepayments on long-term debt
Payments to repurchase equity stock
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