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Questions and Answers
What does a Z-Score greater than 3.00 indicate for a company like Home Depot?
How accurately does the Z-Score predict bankruptcy in Year 1?
Which component contributes the least to Altman's Z-Score calculation?
What is the Z-Score formula primarily used for?
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What is the primary focus of the Z-Score when evaluating a company’s financial health?
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What is the primary purpose of the Credit Rating Agency Reform Act?
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How does the issuer's credit rating differ from the issue rating?
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What is the role of bankruptcy prediction indicators?
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What is a significant factor considered in Altman's Z-Score?
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What does a Z-Score above 3 typically indicate?
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What is primarily assessed by credit analysts when analyzing an issuer's creditworthiness?
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How do credit rating agencies generally predict loan default?
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The FFO/DEBT ratio is primarily used to assess which aspect of an issuer's financial health?
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In credit rating analysis, what does a strong business risk profile indicate?
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What is likely considered the baseline credit rating for an issuer with a strong business risk profile and an FFO/DEBT ratio of 25%?
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Which ratio is commonly used in S&P's determination of financial risk?
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What does Altman's Z-Score primarily evaluate?
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A Z-Score result above 2.99 typically indicates what?
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Study Notes
Altman's Z Model
- Predicts bankruptcy risk for up to two years with 95% accuracy in Year 1 and 72% accuracy in Year 2
- Working capital, retained earnings, EBIT, market value of equity, and sales are included in the formula
- A Z-score in excess of 3.00 suggests a healthy company with a low risk of bankruptcy in the short term
Credit Rating Analysis
- Credit analysts at rating agencies consider macroeconomic, industry, and firm-specific information
- Assessing chance of default and ultimate payment in the event of default
- Fair degree of accuracy in predicting loan default
S&P Global Ratings
- Financial risk determined using cash flow and leverage ratios, similar to those used in the textbook
- Composite rating for Verizon is bbb+
- FFO/DEBT ratio, Debt/EBITDA, and Debt to Capital are key indicators in their analysis
Credit Rating Agency Reform Act (2006)
- Established a registration system for credit rating agencies
- Separation of rating activities from other business activities
- Improved transparency, including disclosure of methodologies, performance track records, and conflicts of interest
- Created list of Nationally Recognized Statistical Ratings Organizations (NRSRO)
- The SEC has designated only 9 agencies as NRSROs
Rating of Issuers vs Rating of Issue
- Issuer's rating addresses overall creditworthiness and typically pertains to senior unsecured debt
- Issue rating refers to specific financial obligations and considers ranking in the capital structure, such as secured or subordinated
- Cross-default provisions may indicate similar default probabilities for all outstanding debt
Bankruptcy Prediction Indicators
- Assess a company's bankruptcy risk at a specific point in time
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Description
This quiz explores key concepts related to Altman's Z Model, credit rating analysis, and relevant regulations such as the Credit Rating Agency Reform Act of 2006. Learn how to evaluate bankruptcy risks and creditworthiness using financial ratios and models. Test your understanding of these essential financial tools and their applications in assessing company health and risk.
