Session 9

Question 1

Motivations for credit analysis

Answer 1

Is a type of financial analysis that an investor/Bond portfolio manager performs on companies/governments/any other debt-issue entities to measure the issuers ability to meet its debt obligation

Question 2

Beneficiaries of credit analysis

Answer 2

Customers 
Suppliers 
Banks and other lenders 
Equity investors 
Employees
Investors in distressed debt 
Borrowers 
Auditors 
Rating agencies

Question 3

Meaning of insolvency

Answer 3

Applied to UK companies
Bankruptcy in US
Campanies cannot pay debts as they fall due
Precursor to formal restructuring arrangements

Question 4

Common causes of insolvency

Answer 4

Profitability low/declining 
Inappropriate diversification-may not have moved with the times 
Import penetration 
Gearing too high - debt > equity 
Geographical spread 
Over-trading

Question 5

ROE

Answer 5

Net income /(common equity + preferred equity)

Question 6

ROCE

Answer 6

=EBIT /(total debt + total equity)

Question 7

Debtor days

Answer 7

(Trade debtors / credit sales ) x 365

Number of days it takes you to pay back debts

Question 8

Creditor days

Answer 8

= trade creditor / credit purchases * 365

Question 9

Asset turnover

Answer 9

Sales / (LT debt + equity capital)

How quickly you are turnover over your revenues

Question 10

Total debt to cash flow

Answer 10

(Short term debt + long term debt)/ cash flow from operations
Total debt position manageable in relation to Cash flow from operations

Question 11

Univariant predictive model

Answer 11

If the cash going in didn’t match the cash going out there is a problem