7. A credit analyst is looking at three ditterent companies-an auto company, a d

Question

7. A credit analyst is looking at three ditterent companies-an auto company, a drug company and a mining company. The auto and mining companies are cyclical. The drug company is non- cyclical. The least credit risk is likely in the a. Auto company b. Drug company c. Mining company 19. Same companies in #17. The auto company has a debt/ebitda ratio of 6.0, the mining company has a debt/ebitda of 2.0 and the drug company has a debt/ebitda ratio of 1.0. Which company likely carries the most credit risk? a. Auto company b. Drug company c. Mining company 20. At the bottom of an economic cycle the loss severity on a credit default is likely to be a. Lower b. Higher c. Unchanged 21. At default at a company that is in a mature/declining industry is likely to experience severity that is a. Lower b. Higher c. Unchanged

Explanation / Answer

17. b.Drug Company; The cyclical companies are more posed to risk because of inflation risk, demand risk where as non cyclical companies will be less posed to those specified risks.

19. a.Auto Company; The Auto Company is most credit risk company because it has high Debt/EBITDA of 6 which means they have more debt and/or less earnings.

20. b.Higher; "At the bottom of Economic cycle" means Recession. Recession will rise when there is higher loss severity on a credit default because of slow movement of cash, unemployment rise, and inflation risk.

21. C.Unchanged; Mature industry will have slow growth and at a default stage the severity they experience is unchanged because earnings and growth of company in the market are stable.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.