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

ikoreaii

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.

ikoreaii

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.

ikoreaii

Which of the following statements is most accurate regarding the issuance of high yield debt under a holding company structure?

A) Debt is borrowed at the parent company level and funds to pay the obligation are obtained from operating subsidiaries.

B) The analysis of subsidiary financial ratios and performance is unimportant because the debt repayment is made from the parent's cash flows.

C) Debt is borrowed at the subsidiary level and funds to pay the obligation are obtained from the parent company.

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Debt is borrowed at the parent company level and funds to pay the obligation are obtained from operating subsidiaries.

ikoreaii

High yield debt structures will least likely have which of the following characteristics?

A) Bank debt.

B) Payment-in-kind bonds.

C) Well collateralized senior debt.

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It is unlikely that high yield debt will be well collateralized. If a high yield issue is collateralized, the collateral will be on an uncertain nature.

ikoreaii

Which of the following statements regarding loan covenants is least accurate?

A) Loan covenant analysis is seldom used in the analysis of high-yield issues.

B) Empirical studies have found the returns of high-yield bonds to be more highly correlated with equity returns than with returns on investment grade bonds.

C) Banks have a higher priority claim over a firm's assets.

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Loan covenant analysis is especially important in the analysis of high-yield issues. Typically restrictive covenants are used to limit the corporate manager’s ability to participate in more speculative investments. The intentions of management may be revealed by their objections to certain covenants that they may interpret as “too restrictive.” Both of the other statements are true.

ikoreaii

When analyzing the credit risk of the holding company, it is critical for the analyst to focus on all of the following EXCEPT:

A) the cash flows generated by the subsidiary.

B) ratio analysis of the parent company.

C) how cash flows move between subsidiaries.

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The ratio analysis of the parent company provides little insight into the financial health of the company since the cash flows come from the subsidiary units of the parent company.

ikoreaii

Which of the following statements regarding the analysis of covenants for high-yield issuers is least accurate?

A) An analysis of covenants is more critical for high-yield issuers than for investment grade issuers.

B) An analyst should examine whether a no contest clause exists that may change the priority of the claims of the firm's debtholders.

C) Covenants provide important insight into the issuing company's strategy.

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It is especially important to analyze the covenants of a high yield issuer to gain insight into corporate strategy.