1．Which of the following statements regarding the analysis of an issuer’s capacity to pay is FALSE?

A)   A noncontractual line of credit is viewed as a strong back-up facility.

B)   An analyst should examine the firm's financial position over the past three to five years to help determine capacity to pay.

C)   A "material adverse change clause" would weaken a back-up facility.

D)   To properly analyze a third-party guarantee involving a parent company, the analyst must also perform a credit analysis of the parent company.

2．Which of the following is most likely to affect the analysis of a firm's ability to repay the interest and principal components of its debt?

A)   The character of the firm's management.

B)   The firm's ability to generate operating cash flows.

C)   The collateral pledged to the debt issue.

D)   The level of the company's debt to total assets ratio.

3．All of the following represent sources of liquidity for a company EXCEPT:

A)   Operating cash flows.

B)   Financing cash flows.

C)   Investing cash outflows.

D)   Back-up credit facilities.

4．Which of the following factors is part of the analysis of an issuer’s character?

A)   Basic operating position.

B)   Company structure.

C)   Strategic direction.

D)   Basic competitive position.

5．Rating agencies consider all of the following when assessing the quality of a firm's management EXCEPT:

A)   Human resources policy.

B)   Strategic direction.

C)   Financial philosophy.

D)   Ability to react to unexpected events.

1．Which of the following statements regarding the analysis of an issuer’s capacity to pay is FALSE?

A)   A noncontractual line of credit is viewed as a strong back-up facility.

B)   An analyst should examine the firm's financial position over the past three to five years to help determine capacity to pay.

C)   A "material adverse change clause" would weaken a back-up facility.

D)   To properly analyze a third-party guarantee involving a parent company, the analyst must also perform a credit analysis of the parent company.

The correct answer was  A)

A strong back-up facility exists when a lender is contractually obligated to provide back-up financing. If the agreement is noncontractual then the back-up facility is considered weak.

2．Which of the following is most likely to affect the analysis of a firm's ability to repay the interest and principal components of its debt?

A)   The character of the firm's management.

B)   The firm's ability to generate operating cash flows.

C)   The collateral pledged to the debt issue.

D)   The level of the company's debt to total assets ratio.

The correct answer was  B)

Although we would look at the company's debt-to-total assets ratio in determining the company's ability to repay its debt, the operating cash flows tend to be more critical to the analysis.

3．All of the following represent sources of liquidity for a company EXCEPT:

A)   Operating cash flows.

B)   Financing cash flows.

C)   Investing cash outflows.

D)   Back-up credit facilities.

The correct answer was  C)

Of the four elements, the investing cash outflows would not be a source of liquidity for the firm.

4．Which of the following factors is part of the analysis of an issuer’s character?

A)   Basic operating position.

B)   Company structure.

C)   Strategic direction.

D)   Basic competitive position.

The correct answer was  C)

Important considerations of the issuer’s character include: strategic direction, financial philosophy, conservatism, track record, succession planning, and control systems.

5．Rating agencies consider all of the following when assessing the quality of a firm's management EXCEPT:

A)   Human resources policy.

B)   Strategic direction.

C)   Financial philosophy.

D)   Ability to react to unexpected events.

The correct answer was  A)

Of the factors listed, the firm's human resouces policies would be the least important factors considered when assessing management quality.