“Four Cs of credit analysis” is used by analysts to evaluate creditworthiness. For each of the following scenarios, which of the “Four Cs” should be used for evaluation? Please also explain your answers. ScenariosWhich of the “Four Cs”1. Company Z cannot issue dividends unless all bondholders have been paid the interests or coupons. In addition, the dividend payments cannot be greater than 30% of company’s annual EBIT. 2. Company Y decides to issue debt, but its management is less credible with poor track records. 3. Company X has to pay $50,000 interest expense every year if debt is issued, but it only has an operating cash flow of $40,000 per year. 4. Company ABC decides to issue debt. However, it operates in an industry with 10 competitors, and it only has a market share of 3%. Investors are concerned with X’s ability to maintain stable cash flows over time.

Credit analysis When an investor does financial analysis on governments, companies, etc. to check…

Answered: “Four Cs of credit analysis” is used by…

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 4QE

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Question

“Four Cs of credit analysis” is used by analysts to evaluate creditworthiness. For each of the following scenarios, which of the “Four Cs” should be used for evaluation? Please also explain your answers.

Scenarios	Which of the “Four Cs”
1. Company Z cannot issue dividends unless all bondholders have been paid the interests or coupons. In addition, the dividend payments cannot be greater than 30% of company’s annual EBIT.
2. Company Y decides to issue debt, but its management is less credible with poor track records.
3. Company X has to pay $50,000 interest expense every year if debt is issued, but it only has an operating cash flow of $40,000 per year.
4. Company ABC decides to issue debt. However, it operates in an industry with 10 competitors, and it only has a market share of 3%. Investors are concerned with X’s ability to maintain stable cash flows over time.