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5 Cards in this Set
- Front
- Back
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Why reformulate for credit analysis and difference from reformulation for equity analysis |
For credit analysis, reformulated to figure out firm's liquidity so ability to repay its debts. So
- Assets in order of liquidity - Liabilities in order of maturity.
Equity analysis groups in such a way as to figure out underlying profitability. |
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"Moral hazard" problem with business debt |
Moral hazard arises for lender if borrower has incentive to act in way which makes debt riskier.
- Lending becomes more risky with no extra return to lender - Lender should protect himself by constraints through lending agreement/debt covenants/choose higher required rate of return for such scenario |
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How does pro forma analysis help in credit analysis? |
Pro formas indicate cash available for debt service and the debt service requirements in the future. Therefore, indication of likelihood to default. |
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Why might a def tax liab not be considered a liab for credit scoring? |
If DTL unlikely to be paid, it's not a true debt obligation that has to be serviced. E.g. in growing firm, DTL is continually "rolled over" and never paid. |
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What are two problems when using Z-scores? |
1. Based on current financial statement, not pro formas which indicate liquidity in the future when debt matures. 2. Market value of equity included in calculation. Market value is circular. What if it's wrong? |
