Which of the following statements regarding the analysis of an issuers capacity to pay is FALSE? A) An analyst should examine the firm’s financial position over the past three to five years to help determine capacity to pay. B) A noncontractual line of credit is viewed as a strong back-up facility. C) A “material adverse change clause” would weaken a back-up facility. D) To properly analyze a third-party guarantee involving a parent company, the analyst must also perform a credit analysis of the parent company. Crapppp this is the question I start with and get it right on my face, will apply dettol and get back to Qbank.
B, since it is noncontractual it can not be a strong form of credit. I think.
I have NO IDEA, but I think having a material adverse event clause would STRENGTHEN capacity to pay? C)???
I’ll throw at A. If you’re analyzing their capacity, last years cash flow won’t help. This is a very random guess though because I have no clue.
wandering and mwvt9 are correct! - B is the correct answer
If the company is going bad the bank will pull the lines of credit from the company (no contract to hold them to the lines).
Its obvious after the fact. I feel stupid.
I also got B because line of credit just means that the company can borrow money somewhere else -> more debt potentially -> more credit risk
What is a line of credit - I don’t understand this concept. Who can use it, where can this line be used? Sorry for being ignorant I don’t work in the industry and don’t understand this line concept :-(. Could someone throw some light on what is it exaclty. Is Credit card a line of credit??
Yes. A credit card is a revolving line of credit. A Home Equity Line of Credit (HELOC) is another example. You can borrow against the value of your home. You don’t have to borrow the full amount, so if you qualify for 10K you might only borrow 5k now and maybe some more in a year. So the line is just sitting there waiting for you. In the case of the question it can be yanked at any time by the bank (provider).
Thanks mwvt, got it now…
maratikus Wrote: ------------------------------------------------------- > I also got B because line of credit just means > that the company can borrow money somewhere else > -> more debt potentially -> more credit risk Capacity to pay is oriented towards short term view the other aspects of creditvare longer term. I worked in j&j up until today (my last day going back to school) doing credit analysis for some shady companies (hard times in pharma means more presure to sell to companies facing industry pressures) and a backup credit facility or room on existing facilities is a good thingeven if they are highly leveraged as this provides a safety cushion in case adverse events cause them to have lower CFO, then they can use debt to avoid short term insolvency and pay their ap.
cfai texts state the same thing as well.
BS …that makes sense…however maybe the key word here is “viewed as a STRONG back up facility” since there is no contractual obligation by the bank to provide they credit - they have the option of backing out …right? also Dinesh… several companies (including banks themselves) get revolving credit lines - but like mwvt said - they might qualify for say USD 500 million - but they don’t necessarily use it all up at once…it might be taken in bits and pieces as and when funding is required.
Mumu, I agree with B, just pointing out that maratikus was looking at the wrong reason.
B . The bank can withdraw the facility.