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Question 1 Below is a list of financial ratios that S&P uses to assess risk for corporate debt. For each ratio, indicate whether financial risk increases or decreases when the ratio is higher. A. Increases B. Decreases Return on Equity - Decrease EBITDA interest coverage - Decrease Operating income/Sales (%) - Decrease Free operating cash flow/Total debt (%) - Decrease Total debt/equity (%) - Increase EBIT interest coverage - Decrease Long-term debt/equity (%) - Increase What is the risk premium for a company that has a yield rate of 7.07% when the risk-free rate is 3.78%? 10.85% -3.29% 3.29% 3.78% Wild Inc. receives a bill from Easton Inc. for $15,000. Easton has credit terms of 2/15, net 45. If Wild takes advantage of the discount, how much cash do they pay to Easton? $15, $13, $15, $14, Nike Inc. offers Foot Locker credit terms of 4/20, net 45. If Foot Locker does not take the early payment discount, Foot Locker is effectively paying what annual rate of interest? 4.0% 58.4% 40.0% 29.2% Which of the following corporate debt ratings are ordered in terms of decreasing market interest rate?
BB, C, A, AAA
AAA, A, BB, C
A, AAA, BB, C
C, BB, A, AAA
In general, how do credit analysts determine the risk-free rate? The average corporate yield The rate defined by the largest U.S. banks The yield on U.S. Government borrowings The weighted-average corporate yield based on the preceding four quarters Credit analysis concerns which of the following? The price of a compan y's stock. The ability of a compan y to consiste ntly pay dividend s. An assessm ent of a compan y's credit- granting policies. The probabili ty a compan y will make timely payment s. On January 1, Powell’s Club borrows $20,000 from Second State Bank. The loan is due in one year along with 6% interest. The company is preparing its quarterly report for March 31. Which of the
Kirner Electric Corp. sells $100,000 of bonds to private investors. The bonds have an 8% coupon rate and interest is paid semiannually. The bonds were sold to yield 9%. What periodic interest payment does Kirner make? $8, $16, $2, $4, Which one of the following would be considered a contingent liability? A company believes that it might lose a lawsuit and damages could be $26,000. A company owes $24,000 on inventories purchased on credit. A company has access to a line of credit with a bank in the amount of $46,000. A company estimates that it will probably have to pay $30,000 to the EPA for a chemical spill. Which of the following would not require the company to record an accrual on the balance sheet? The company owes $40,000 in wages to its employees for the previous two weeks. Interest will be paid when a note payable matures in the following accounting period The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. Porters Inc. issued a 120-day note in the amount of $160,000 on 12/14/12 with an annual rate of 9%. What amount of interest has accrued as of 12/31/12? $7, $14, $ $ Selected recent balance sheet and income statement information for American Eagle Outfitters and The Gap, Inc. follows: American Eagle Outfitters The Gap, Inc. (in thousands ) 2011 2011 Year-end accounts payable $ 183,783 (^) $ 1, Average accounts payable 175,753 1, Sales 3,159,818 14, Cost of goods sold 2,031,477 9, Which of the two companies listed above is leaning on the trade more? American Eagle because its accounts payable turnover is greater and its accounts payable days outstanding is lower. Gap because its accounts payable turnover is higher and its accounts payable days outstanding is lower. Gap because its accounts payable turnover is lower and its accounts payable days outstanding is higher.
American Eagle because its accounts payable turnover is lower and its accounts payable days outstanding is higher. Which of the following does not affect the current liabilities section of the balance sheet? Purchase of inventory on credit. Wages owed to employees but not yet paid. Insurance bill to be paid next month. Sale of goods on credit. Which one of the following is NOT correct? For debt issued at a premium, interest expense reported on the income statement equals cash interest payment less amortization of the premium. For debt issued at par: interest expense reported on the income statement equals the cash paid for interest. For bond repurchases: Gain (loss) on bond repurchase = Cash paid to repurchase – Net book value of bonds. For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount.
