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Which of the following ratios is NOT used to assess the adequacy of cash flows generated through earnings that can be used to meet debt and lease obligations?

A) Earnings before interest and taxes (EBIT) interest coverage ratio.

B) Funds from operations/total debt ratio.

C) Total debt to capitalization ratio.

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The total debt to capitalization ratio measures the firm’s ability to manage the additional risk associated with additional leverage.

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Which ratio group measures the firm’s ability to manage the additional risk associated with increased borrowing?

A) Coverage ratios.

B) Short-term solvency ratios.

C) Capitalization ratios.

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Capitalization ratios measure the firm’s ability to service its debt. Two of these measurements include the long-term debt to capitalization ratio and the total debt to capitalization ratio. The higher the ratios, the less able the firm is to manage additional debt.

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Which of the following is NOT a means of determining whether a firm is able to pay its obligations as they come due?

A) Acid-test ratio.

B) Profit margin.

C) Working capital.

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Adequate working capital is important in meeting current liabilities. Two ratios that help assess working capital are the acid-test ratio and the current ratio.

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Each of the following statements is an integral part of the debt rating process EXCEPT:

A) compare the effects of earnings per share dilution of the firm under analysis to other firm's within the industry with respect to recent equity issuances.

B) calculate the company's solvency, capitalization, and coverage ratios.

C) compare the company's solvency, capitalization, and coverage ratios to the average ratios of other firms in various rating categories.

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In a credit analysis setting, the impact of EPS dilution is not likely to be a major concern.

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Which of the following would indicate a lessened capacity by a corporate bond issuer to pay principal and interest? Relative to the industry average, the issuer’s:

A) interest expense is lower relative to earnings.

B) acid-test ratio is lower.

C) equity is higher relative to its long-term debt.

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The acid-test ratio is the current assets minus inventory divided by the firm’s current liabilities. A lower acid-test ratio would indicate lessened capacity to pay principal and interest. In essence, there is less assets to cover the firm’s current obligations. Higher equity relative to debt indicates greater capacity to pay. Lower interest expense indicates greater capacity to pay.

ikoreaii

Discretionary cash flow is defined as (net earnings + depreciation + deferred income taxes − noncash revenue items included in net earnings − increase in adjusted noncash working capital − capital expenditures − cash dividends). This definition is equivalent to which of the following?

A) Cash from financing − dividends payable.

B) Cash from investing − cash from operations (CFO).

C) Free operating cash flow − cash dividends.

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CFO = net earnings + depreciation + deferred income taxes − noncash revenue items included in net earnings − increase in adjusted noncash working capital. Hence, discretionary cash flow = CFO − capital expenditures

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Which of the following statements about the ratio of cash flow from operations to capital expenditures is least accurate?

A) An increasing ratio may imply that the firm has recently expanded but has not yet generated the increased cash flow from operations necessary to bring the ratio back to its normal level.

B) The higher the ratio, the greater the financial flexibility.

C) This ratio is especially useful for capital intensive firms and utility companies.

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A declining ratio may indicate that the firm has gone through a major capital expansion and needs more time before cash flow from operations will increase enough to bring the ratio back up again.

ikoreaii

Which of the following statements addressing the use of cash flow analysis to assess the ability of the issuer to service its debt is least accurate?

A) Discretionary cash flow can be used to determine the company's ability to pay down its debt obligation.

B) The level of discretionary cash flow indicates how safe is the company's dividend.

C) The ratio of cash flow from operations to long-term debt is an indicator of a firm's flexibility with regard to financing decisions.

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When it comes to financing decisions, an indicator of financial flexibility is the ratio of cash flow from operations to capital expenditures.

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Discretionary cash flow is defined as:

A) net income + noncash expenses ± changes in current assets and current liabilities (excluding cash).

B) net income + depreciation +/– other noncash items + decrease (increase) in noncash current assets + increase (decrease) in nondebt current liabilities - capital expenditures - cash dividends.

C) net income + noncash expenses - noncash revenue items included in net income.

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Discretionary cash flow = net income + depreciation +/– other noncash items + decrease (increase) in noncash current assets + increase (decrease) in nondebt current liabilities - capital expenditures - cash dividends.
It represents the cash flow available to a firm after it has funded its basic operating requirements.

ikoreaii

Which of the following is NOT a feature of bank debt?

A) Bank loan contracts generally have little or no negative covenants.

B) Bank debt generally has priority over other debt holders on the firm's assets.

C) The interest rate on bank loans is generally a floating rate.

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Bank loan contracts usually contain several negative covenants. Furthermore, bank debt is generally short-term, variable rate, and higher priority relative to other debt holders.