mcf Wrote: ------------------------------------------------------- > Easiest way to think about it from a credit > analyst perspective is, which of the options would > you lend against. Would you lend against > ‘efficiency’ or ‘accounting profit’ or "scale and > diversity’… if you would, good luck getting > repaid. Only thing that pays the bills when > interest is due is cash from operations (less > capex and dividends to be more picky)… but in > the worst conditions, all you need is cash from > ops. ok let back up a second here everyone. first CFO is not the end all be all measure to indicate a firm’s ability to cover fixed costs… simply think of the countless ways CFO is overstated/ understated in the many FSA topics just covered in your Level I material. one thing is for certain. a creditor is interested in not only short term liquidity and coverage ratios but also longterm ratios as well. CFO ignores financing activity (which would seem particularly interesting to a creditor) as well as CFI. The reason choice (D) is the best answer is operating efficiencies capture a company’s operating performance (EBIT ratios), its fixed costs (operating leverage), liquidity (working capital, current ratio, cash ratio etc etc). A&B are simply wrong because return ratios are typically an equity investor metric and C is wrong because although it can help in better evaluate credit risk, alone is meaningless. ideally Yancey could provide some additional information regarding this question… as in where is it from?
Char-Lee Wrote: ------------------------------------------------------- > mcf Wrote: > -------------------------------------------------- > ----- > > Easiest way to think about it from a credit > > analyst perspective is, which of the options > would > > you lend against. Would you lend against > > ‘efficiency’ or ‘accounting profit’ or "scale > and > > diversity’… if you would, good luck getting > > repaid. Only thing that pays the bills when > > interest is due is cash from operations (less > > capex and dividends to be more picky)… but > in > > the worst conditions, all you need is cash from > > ops. > > > ok let back up a second here everyone. first CFO > is not the end all be all measure to indicate a > firm’s ability to cover fixed costs… simply > think of the countless ways CFO is overstated/ > understated in the many FSA topics just covered in > your Level I material. > > one thing is for certain. a creditor is interested > in not only short term liquidity and coverage > ratios but also longterm ratios as well. CFO > ignores financing activity (which would seem > particularly interesting to a creditor) as well as > CFI. > > The reason choice (D) is the best answer is > operating efficiencies capture a company’s > operating performance (EBIT ratios), its fixed > costs (operating leverage), liquidity (working > capital, current ratio, cash ratio etc etc). > > A&B are simply wrong because return ratios are > typically an equity investor metric and C is wrong > because although it can help in better evaluate > credit risk, alone is meaningless. > > ideally Yancey could provide some additional > information regarding this question… as in where > is it from? I dont agree…the answer is B. The creditor just care about your capacity to repay the debt and hence how much liquidity your operation can produce. If the company will go burst in two years, this is a pity for the shareholders but not the creditor as hopefully they have already received all the repayment.
Maybe people should stop posting questions from Mock Exam 1…folks are going to be pissed when they pay 60 bucks for something which has been analyzed to death on this forum already
Char-lee, I couldn’t disagree more.
nirjraina Wrote: ------------------------------------------------------- > Maybe people should stop posting questions from > Mock Exam 1…folks are going to be pissed when > they pay 60 bucks for something which has been > analyzed to death on this forum already That’s a good point!
so what the answer is it D? I thought credit worthiness relates to liquidity ratios and working capital is important and D is only one that addresses it.
It is B
Credit = Cash Equity = Earnings Very simple thing to keep in mind.
well i did just see this question on the CFAI Mock Exam I… what i find interesting is the referenced reading CFAI Modular Level I, Vol 3 pp 649-650 which makes the case for all choices. mcf, have you read this material?.. it’s worth a glance. in the reading there is a strong (and obviously rational) case for the CFO choice but also a focus on all the elements of the operational efficiency choice as well. although at the bottom of page 649 the following excerpt does make (B) the clear answer… “typically, credit analysts use return measures related to operating cash flow because it represents cash generated internally, which is available to pay creditors”