manchester88

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

B) The character of the firm's management.

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

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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.

manchester88

Which of the following factors is least likely part of the analysis of an issuer’s character?

A) Conservatism.

B) Executive compensation and benefits structure.

C) Succession planning.

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Executive compensation structure is not part of the credit analysis. Credit agencies generally try to assess management quality by understanding business strategies and policies created by management.

manchester88

Which of the following factors is NOT part of the analysis of an issuer’s character?

A) Control systems.

B) Financial philosophy.

C) Parent company support agreements.

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Parent company support agreements are part of the analysis of the capacity of the issuer to pay rather than the issuer’s character.

manchester88

Which of the following least likely represent sources of liquidity for a company?

A) Operating cash flows.

B) Back-up credit facilities.

C) Investing cash outflows.

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

manchester88

Which of the following criteria assesses the ability of the issuer to repay its obligations?

A) Capital.

B) Commitment.

C) Capacity.

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When an analyst examines an issuer’s capacity, the analyst is assessing the issuer’s ability to repay its obligations.

manchester88

Which of the following 4-C's of credit refers to the terms and conditions of the lending agreement?

A) Contracts.

B) Conditions.

C) Covenants.

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Covenants represent the terms and conditions of the lending agreement. Covenants specify restrictions and requirements that management must follow.

manchester88

All of the following are part of the four C’s of credit that Moody’s and S&P use to analyze credit quality EXCEPT:

A) capacity.

B) covenants.

C) category.

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The four C’s of credit are character, capacity, collateral, and covenants.

manchester88

Which of the following items is least likely of concern to the analyst when trying to assess the capacity of the firm to pay its debt?

A) Affirmative covenants.

B) Third-party guarantees.

C) Ability to securitize assets.

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When assessing capacity to pay, the analyst is concerned with the company’s financial position and liquidity. Sources of liquidity include working capital, operating cash flows, back-up credit facilities, securitization of assets, and third-party guarantees. Affirmative covenants are not directly related to the firm's capacity to pay.

manchester88

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

A) Strategic direction.

B) Company structure.

C) Basic operating position.

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

manchester88

Within the context of the 4-C’s of credit analysis, which of the following most accurately describes the “capacity” of a firm?

A) The integrity of management and their commitment toward repayment of the loan.

B) The availability of cash flow and other assets required by a corporation to repay its obligations.

C) The terms and conditions of the loan agreement.

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Capacity is one of the 4-C's of credit analysis and deals with generation of cash flows.