Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The default risk ratio (defined as cash flow from operations divided by the combined annual principal payments on all outstanding loans; a company's cash flow

The default risk ratio (defined as cash flow from operations divided by the combined annual principal payments on all outstanding loans; a company's cash flow from operations equal to net profit plus depreciation. This credit-worthiness measure has the third most important weighting in determining a company's credit rating. A company with a default risk ratio below 2.0 is automatically assigned "high risk" status (because it lacks a comfortably large cash cushion to cover its upcoming principal payments). Companies with a default risk ratio between 2.0 and 4.0 are designated as "medium risk", and companies with a default ratio of 4.0 and higher are classified as "low risk" because their prior cash flows from operations were 4 or more times the size of their annual principal payments).

What can a company do to go from being designated as "high risk" of default to be designated as "medium risk?"

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance and Public Policy

Authors: Jonathan Gruber

5th edition

1464143331, 978-1464143335

More Books

Students also viewed these Finance questions

Question

What are the five basic discovery tools, and how are they used?

Answered: 1 week ago