Deck 5: Risk Analysis

Question 1

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

A) failing to make a required interest payment on time
B) paying an accounts payable after the billing date
C) restructuring debt
D) defaulting on a principal payment on debt

Answer 1

D

Question 2

Refer to the information for Mobile Company . Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was:

A) )70
B) 1.39
C) 1.00
D) )72

Answer 2

D

Question 3

Refer to the information for Mobile Company . Mobile's days accounts payable outstanding at the end of 2010 is:

A) 7.53 days
B) 48.09 days
C) 45.51 days
D) 50 days

Answer 3

B

Question 4

Refer to the information for Mobile Company . Mobile's 2010 Inventory Turnover ratio is:

A) 7.46
B) 11.83
C) 6.16
D) 5.62

Question 5

The Johnson Company has a current ratio of 1.45. The company has just sold $600,000 worth of merchandise on credit. What will the current ratio be after the sales on credit?

A) greater than 1.45
B) 1.45
C) less than 1.45
D) unable to determine without more information

Question 6

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?

A) Firms credit history
B) financial position of the firms creditors
C) firms cash flow
D) a and c

Question 7

Refer to the information for Mobile Company . Mobile's quick ratio changed by what percentage from 2009 to 2010?

A) 30%
B) 107%
C) 25%
D) 82%

Question 8

Economic theory teaches that differences in market returns must relate to differences in:

A) book value
B) perceived risk
C) price-earnings ratio
D) bankruptcy risk

Question 9

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to:

A) pay off accounts payable prior to year-end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.

Question 10

Here are several ratios calculated from Midas Company's financial statements:
Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?

A)  39 days
B) 36 days
C) 56 days
D) 26 days

Question 11

Which of the following ratios is not a measure of long-term solvency risk?

A) Debt /Equity Ratio
B) Interest Coverage Ratio
C) Operating Cash Flows to Current Liabilities Ratio
D) Liabilities to Assets Ratio

Question 12

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below; use the information to answer the following questions:

Refer to the information for Mobile Company . Mobile's current ratio in 2010 was:

A) 1.07
B) 1.45
C) 1
D) )69

Question 13

Which of the following is not one of the three explanatory variables that determine a firm's market beta?

A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.

Question 14

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?

A) Sales
B) Earnings
C) Positive cash flows
D) Income from continuing operations

Question 15

Refer to the information for Mobile Company . Days of other financing required by Mobile at the end of 2010 would be:

A) 54.36 days
B) 75.36 days
C) 102.94 days
D) 5.27 days

Question 16

Doran Corp. has a current ratio of 6. Under which of the following scenarios might this indicate a problem?

A) inventories are increasing due to the introduction of a new product
B) the company is holding cash in expectation of making a large investment in equipment
C) receivables are increasing due to increasing sales
D) inventories are increasing and the industry in which Doran Corp. operates is experiencing a recession

Question 17

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk, which of the following is not one of the factors?

A) Investment factors
B) Financing factors
C) Operating factors
D) Credit factors

Question 18

Univariate bankruptcy prediction models help identify factors related to bankruptcy, but they do not provide information about:

A) specific ratios that are important.
B) the amount of Type I and Type II errors.
C) which specific company will go bankrupt.
D) the relative importance of individual financial statement ratios.

Question 19

Refer to the information for Mobile Company . Mobile's days receivables outstanding at the end of 2010 was:

A) 43.20 days
B) 40.50 days
C) 45.25 days
D) 8.50 days

Question 20

Market equity beta measures the covariability of a firm's returns with the returns of:

A) all industry competitors in the market.
B) risk free securities.
C) all securities in the market.
D) all firms of comparable market value.

Question 21

Below are various states of financial distress:
Defaulting on a principal payment on debt
Restructuring debt
Liquidating a firm
Filing for bankruptcy
Failing to make a required interest payment on time
What is the order of increasing gravity that analysts typically consider when assessing credit risk and bankruptcy risk according to a continuum of financial distress?

A) 5, 1, 2, 3, 4
B) 5, 2, 1, 4, 3
C) 1, 5, 2, 4, 3
D) 1, 5, 2, 3, 4

Question 22

Changes in interest rates can typically affect firms in all of the following ways except :

A) The value of investments in bonds or other investment securities with fixed interest rates.
B) The value of liabilities with fixed interest rates.
C) The returns a firm generates from pension fund investments.
D) The cash-equivalent value of assets invested abroad.

Question 23

Short-term ____________________________ represents a firm's near-term ability to generate cash to service working capital needs and debt service requirements.

Question 24

Long-term ______________________________ represents the longer-term ability of the firm to generate cash internally or from external sources to satisfy plant capacity and debt repayment needs.

Question 25

Marker's 2012 Liabilities to Shareholders' Equity ratio is:

A) 100.0%
B) 170.9%
C) 63.1%
D) 129.3%

Question 26

All of the following are common industry risks faced by companies except :

A) litigation
B) technology
C) regulation
D) competition

Question 27

All of the following are common international risks faced by companies except :

A) asset expropriation
B) exchange rate changes
C) political unrest
D) dependence on one or a few suppliers

Question 28

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in investing?
 

Question 29

The quick acid test ratio contains all of the following except :

A) cash
B) accounts receivable
C) marketable securities
D) prepaid assets

Question 30

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in operations?
 

Question 31

The source of risk related to political unrest and exchange rate changes are _________________________.

Question 32

Which of the following can companies use as collateral for a loan?

A) prepaid insurance
B) prepaid rent
C) property, plant, and equipment
D) retained earnings

Question 33

All of the following are common domestic risks faced by companies except :

A) recessions
B) technology
C) inflation
D) demographic shifts

Question 34

Below is selected information from Marker's 2012 financial statements:

A) 105.1%
B) 63.1%
C) 78.3%
D) 100.0%

Question 35

Marker's 2012 Long-term Debt to Shareholders' Equity ratio is:

A) 31.4%
B) 29.4%
C) 34.0%
D) 45.8%

Question 36

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in financing?
 

Question 37

Marker's 2012 Long-term Debt to Long-Term Capital ratio is:

A) 31.4%
B) 29.4%
C) 34.0%
D) 25.4%

Question 38

All of the following typically drive firm-specific risks except :

A) the nature of the business
B) competition
C) supplier relationships
D) demographic shifts

Question 39

Changes in foreign exchange rates can affect a firm in all of the following ways except :

A) The prices a firm pays to acquire raw materials from suppliers abroad.
B) The amount of cash a firm receives when it collects an account receivable, a loan receivable, or another receivable denominated in a currency other than its own.
C) The value of domestic liabilities with fixed interest rates.
D) The prices a firm charges for products sold to customers abroad.

Question 40

Marker's 2012 Interest Coverage ratio is:

A) 7.66
B) 1.00
C) 11.35
D) 4.35

Question 41

Common shareholders benefit with increasing proportions of debt in the capital structure as long as the firm maintains an excess of ____________________ over the after-tax cost of debt

Question 42

When management takes deliberate steps at a balance sheet date to produce a better current ratio than is normal it is called ______________________________.

Question 43

The current ratio is one of the measures of the __________ of the firm.

Question 44

_________________________ concerns a firm's ability to make interest and principal payments on borrowings as they become due.

Question 45

The source of risk related to management competence, strategic direction and lawsuits is _________________________.

Question 46

One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.

Question 47

The source of risk related to technology, regulation and availability of raw materials is ____________________.

Question 48

An analyst can view the revenues to cash ratio as a(n) ______________________________________.

Question 49

Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ______________________________.

Question 50

The ________________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense.

Question 51

The source of risk related to interest rate changes and demographic changes is ____________________.

Question 52

By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of _____________________________________________ the firm requires.

Question 53

Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.

Question 54

In general, the shorter the number of days of needed financing, the ____________________ is the cash flow from operations to average current liabilities.

Question 55

The operating cycle must not only generate cash to supply ________________________________________ needs, it must generate sufficient cash to service debt.

Question 56

The beta coefficient measures the ____________________ of a firm's returns with those of all shares traded in the market (in excess of the risk-free interest rate).

Question 57

When calculating the quick ratio, an analyst would include in the numerator cash, ________________________________________, and receivables.

Question 58

The analysis of short-term liquidity risk requires an understanding of the _________________________ of a firm.

Question 59

When the excess of ROA over the after-tax cost of borrowing declines, additional ________________________________________ begins to reduce the return to common shareholders.

Question 60

Financially healthy firms frequently close any cash flow gaps in their operating cycles with ________________________________________.

Question 61

Working capital is defined as ______________________ minus _____________________.

Question 62

The main ratio used by many financial analysts to examine a company's short-term liquidity risk is the current ratio. However, there are a number of problems that arise when this ratio is used to examine short-term liquidity risk that may make the current ratio less useful than initially thought. Discuss the interpretative problems of using the current ratio.

Question 63

One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator. Detail how the interest coverage ratio and fixed charges coverage ratio are calculated. In addition, discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.

Question 64

For each of the following scenarios, determine if it is an indicator of potential cash flow problems:

Question 65

A. What are the three measures that are used to analyze long-term solvency risk?
B. describe each measure briefly

Question 66

Bankruptcy analysis research has gone through many iterations, from univariate bankruptcy prediction models to sophisticated logit models. However, after examining the results of the research there appear to be a number of common factors that consistently explain bankruptcy. These factors can be grouped into investment factors, financing factors, operating factors. For each of the three groups discuss specific factors that have been found to significantly explain bankruptcy.

Question 67

When a company wants to calculate the current ratio they would divide the current assets by the ___________

Question 68

When a financial analyst examines the credit risk of a company, it is common that he or she uses a set of factors that all begin with the letter "C." Each factor provides a consideration that enters into the lending decision. List and discuss how each of the factors affects a company's credit risk.

Question 69

The current risk-free rate of return in the economy is 6%. In addition, the market rate of return is currently 8.5%.
A. Given this information, what would be the expected return on common stock for a company with a systemic risk level (Beta) of 1.3? Show your calculations.
B. Describe systemic risk.