Credit Analysis (L10)

Question 1

credit analysis

Answer 1

assess credit worthiness of a company
the likelihood of them not being able to pay back the og value or the money with interest

Question 2

if a firm isn’t creditworthy…

Answer 2

more likely to default on payments (miss payments)
more likely to go bankrupt (company closed)
harder to obtain loans

Question 3

causes of bankruptcy

Answer 3

recession
high interest rate
loan refused/limited credit supply
regulations/comp
size,age, private or public company
fraud

Question 4

how to find credit analysis

Answer 4

financial ratio analysis
z-score
distance to default

Question 5

financial ratio

Answer 5

shows trends, monitors firm performance by looking at ratios of liabilities/assets, ebit/asset, cash flows/assets

Question 6

who gets charged a higher interest rate

Answer 6

more risky company

Question 7

limitations of financial ratio analysis

Answer 7

doesn’t quantify the riskiness/creditworthiness of a company
time consuming to analyse
so many financial ratios

Question 8

z-score

Answer 8

combines financial ratios to find credit worthiness (weighted)
1.2working capital/total assets +1.4retained earnings/total assets +3.3EBIT/total assets+0.6market value of equity/total liab + sales/total assets

Question 9

z-score risk assessment

Answer 9

<1.80 high risk
2.99< low risk
in-between is a grey area

Question 10

z score limitations

Answer 10

outdated
doesn’t consider enough factors eg macroeconomic factors

Question 11

distance to default

Answer 11

V market value of assets
F face value of liab
u growth of market value of assets
o volatility
V<F, bankruptcy if its when they have to pay up
Ev-F/o = V*(1+u)^T-F/o
higher DD= better credit worth