Please provide step by step to the attached 3 questions.
Homework Assignment - Chapter 5 1. When a financial analyst examines the credit risk of a company, it is common that he or she uses a set of factors that all begin with the letter "C." Each factor provides a consideration that enters into the lending decision. List and discuss how each of the factors affects a company's credit risk. ANS: 1. Circumstances leading to need for the loan - The reasons that the company needs to borrow affect the riskiness of the loan and the likelihood of repayment. 2. Credit History - Has the firm borrowed in the past and successfully repaid the loan. 3. Cash flows - Is the lender generating sufficient cash flows to pay interest and repay the principal on a loan rather than having to rely on selling the collateral. 4. Collateral - Is the collateral sufficient to repay the loan and does the lender have the right to take possession of the collateral. 5. Capacity for debt - Has the company borrowed up to its capacity or is there a margin of safety remaining. 6. Contingencies - Are there any events on the horizon that would harm the company if their outcome is negative. 7. Character of management - An intangible factor, has the management team been successful in difficult times, are they honest and forthcoming. 8. Communication - Developing relations with lenders requires effective communication both initially and on an ongoing basis. 9. Conditions - What are the restrictions or covenants put in place to protect the lender. Each of these factors must be examined in the multivariate manner so that the total credit risk profile of the company can be determined. 2. Given the following information, calculate for Year 2 the number of days of working capital financing the firm will need to obtain from other sources? Accounts Receivable, net Accounts Payable Inventory Credit Sales Cost of Goods Sold Selling and Admin. Expense Year 1 $ 518 203 535 Year 2 $ 562 192 564 3,205 2,037 1,081 3,636 2,294 1,131 3. Refer to the financial statement data for Patriot Corp. for 2011 and 2010. Complete the table by computing the ratios. Patriot Corp. Balance Sheet As of December 31, Assets: Cash and Cash Equivalents Accounts Receivable Inventory Current Assets 2011 2010 $ 69,000 126,500 92,000 287,500 $ 55,250 80,750 63,750 199,750 194,063 -38,813 155,250 132,250 148,750 -29,750 119,000 106,250 Total assets: $575,000 $425,000 Liabilities: Accounts Payable Accrued Salaries Payable Rent Expense Payable Income Tax Payable Current Liabilities $ 69,000 51,750 35,750 4,788 161,288 $ 42,500 42,500 28,500 1,250 114,750 Long-term note payable Total Liabilities 172,500 333,788 102,000 216,750 Stockholders' Equity: Common stock Retained earnings 115,000 126,212 89,250 119,000 $575,000 $425,000 Equipment Less: Accumulated depreciation Equipment-Net Land Total liabilities and stockholders' equity: Patriot Corp. Income Statement For the year ended December 31, 2011 Revenues Cost of goods sold Gross Profit Operating Expenses Depreciation expense Salary expense Insurance Expense $ 373,750 (224,250) $149,500 (9,062) (56,063) (44,850)
