1. A credit analyst is looking at three different companies – an auto company, a
ID: 2803078 • Letter: 1
Question
1. A credit analyst is looking at three different companies – an auto company, a drug company and a mining company. The auto and mining companies are cyclical. The drug company is non-cyclical. The least credit risk is likely in the
a. Auto company
b.Drug company
c. Mining company
2. Same companies in #17. The auto company has a debt/ebitda ratio of 6.0, the mining company has a debt/ebitda of 2.0 and the drug company has a debt/ebitda ratio of 1.0. Which company likely carries the most credit risk?
a.Auto company
b. Drug company
c. Mining company
3. At the bottom of an economic cycle the loss severity on a credit default is likely to be
a. Lower
b.Higher
c. Unchanged
4. At default at a company that is in a mature/declining industry is likely to experience severity that is
a.Lower
b. Higher
c. Unchanged
Explanation / Answer
1. Drug business as non cyclical has least credit risk
2. Auto company as it has the most debt/ebdita ratio which clearly depicts more risk .
3. The severity of the credit risk will be higher for a company at the bottom of the economic cycle since it will not be able to recover from it in the future.
4. The loss severity will be unchanged for a mature company
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