CCP Credit Analysis & Risk Assessment 2

Question 1

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?

Accepted Answer

6x, indicating high leverage and elevated repayment risk

Answer

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.

Question 2

Which qualitative factor is MOST critical when assessing the credit risk of a small, owner-operated business?

Accepted Answer

Key-person dependency and management succession plan

Answer

Owner-operated businesses face key-person risk; if the owner is incapacitated, the business may not survive, making succession planning a critical qualitative factor.

Question 3

What does a declining Current Ratio over three consecutive fiscal years most likely signal to a credit analyst?

Accepted Answer

Deteriorating short-term liquidity and potential cash flow stress

Answer

A consistently declining Current Ratio indicates that current liabilities are growing faster than current assets, signaling worsening short-term liquidity.

Question 4

Under the concept of 'sensitivity analysis' in credit risk, what is the primary purpose?

Accepted Answer

To test how changes in key assumptions (e.g., revenue decline) affect debt serviceability

Answer

Sensitivity analysis stress-tests financial projections by varying key inputs to assess how much deterioration a borrower can absorb before defaulting.

Question 5

A company has net sales of $2,000,000 and average accounts receivable of $400,000. What is its Days Sales Outstanding (DSO)?

Accepted Answer

73 days

Answer

DSO = (Average AR / Net Sales) × 365 = (400,000 / 2,000,000) × 365 = 73 days, indicating how long it takes to collect receivables.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP Credit Analysis & Risk Assessment 2