Credit Analysis & Risk Assessment Flashcards
7 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Analysis & Risk Assessment flashcards as text
A borrower's EBITDA is $500,000 and total debt is $3,000,000. What is the Debt/EBITDA ratio, and how is it generally interpreted?
Answer: 6x, indicating high leverage and elevated repayment risk
Debt/EBITDA of 6x means it would take 6 years of EBITDA to retire the debt, which is considered high leverage and signals elevated credit risk.
Which qualitative factor is MOST critical when assessing the credit risk of a small, owner-operated business?
Answer: Key-person dependency and management succession plan
Owner-operated businesses face key-person risk; if the owner is incapacitated, the business may not survive, making succession planning a critical qualitative factor.
What does a declining Current Ratio over three consecutive fiscal years most likely signal to a credit analyst?
Answer: Deteriorating short-term liquidity and potential cash flow stress
A consistently declining Current Ratio indicates that current liabilities are growing faster than current assets, signaling worsening short-term liquidity.
Under the concept of 'sensitivity analysis' in credit risk, what is the primary purpose?
Answer: To test how changes in key assumptions (e.g., revenue decline) affect debt serviceability
Sensitivity analysis stress-tests financial projections by varying key inputs to assess how much deterioration a borrower can absorb before defaulting.
A company has net sales of $2,000,000 and average accounts receivable of $400,000. What is its Days Sales Outstanding (DSO)?
Answer: 73 days
DSO = (Average AR / Net Sales) × 365 = (400,000 / 2,000,000) × 365 = 73 days, indicating how long it takes to collect receivables.
Which credit risk concept describes the potential loss a lender faces if a borrower defaults, taking into account collateral recovery?
Answer: Loss Given Default (LGD)
LGD represents the proportion of exposure a lender loses after recovering proceeds from collateral or guarantees following a default.
When analyzing a borrower in a cyclical industry (e.g., construction), which approach is MOST appropriate for spreading financials?
Answer: Average performance across a full business cycle, not just peak-year financials
Cyclical industries require through-the-cycle analysis to avoid over-weighting peak earnings that will not persist through downturns.