CREDIT ANALYSIS AND DISTRESSPREDICTION
MULTIPLE CHOICE
1. What is the primary purpose of credit analysis?
a) Assessing the market potential of a company
b) Evaluating the creditworthiness of borrowers
c) Predicting future market trends
d) Analyzing the liquidity position of a company
2. Which of the following is NOT a factor considered in credit analysis?
a) Financial ratios
b) Industry trends
c) Economic forecasts
d) Political affiliations
3. Distress prediction models aim to:
a) Identify investment opportunities
b) Forecast future market volatility
c) Predict the likelihood of a company experiencing financial distress
d) Analyze consumer spending habits
4. Altman's Z-score is a distress prediction model that primarily focuses on:
a) Assessing credit risk in consumer lending
b) Evaluating the probability of bankruptcy for companies
c) Predicting stock price movements
d) Analyzing interest rate trends
5. Which of the following is NOT typically used as an input in distress prediction models?
a) Historical financial data
b) Market capitalization
c) Industry classification
d) Regulatory changes
6. Credit analysis involves evaluating:
a) Only quantitative factors
b) Only qualitative factors
c) Both quantitative and qualitative factors
d) Neither quantitative nor qualitative factors
7. Which financial ratio is commonly used in credit analysis to assess a company's ability
to meet its short-term obligations?
a) Debt-to-Equity ratio
b) Current ratio
c) Price-to-Earnings ratio
d) Return on Investment ratio
8. Which of the following statements is true about distress prediction models?
a) They are primarily used for assessing credit risk in consumer lending
b) They rely solely on qualitative factors for predicting distress
c) They provide a binary outcome - distressed or not distressed
d) They are only applicable to large corporations
9. In credit analysis, what does the Debt Service Coverage Ratio (DSCR) measure?
a) A company's ability to meet its long-term debt obligations
b) The level of market risk associated with a company's stock
c) The amount of debt a company has relative to its equity
d) A company's ability to generate enough cash flow to cover its debt payments
10. Which of the following is a qualitative factor considered in credit analysis?
a) Return on Assets
b) Revenue growth
c) Management quality
d) Current ratio
11. Which of the following distress prediction models uses a combination of financial ratios
to assess bankruptcy risk?
a) Merton's model
b) The Altman Z-score
c) The KMV model
d) The Black-Scholes model
12. Credit analysis is primarily used by:
a) Investors
b) Lenders and creditors
c) Market analysts
d) Government regulators
13. What is the purpose of using a probability of default (PD) model in credit analysis?
a) To predict the future stock price of a company
b) To estimate the likelihood of a borrower defaulting on its debt obligations
c) To forecast interest rate movements
d) To analyze market sentiment
14. Which of the following statements about credit analysis is true?
a) It is only relevant for assessing consumer credit risk
b) It is static and does not require updating
c) It focuses solely on short-term financial metrics
d) It helps lenders make informed decisions about extending credit
15. Which distress prediction model uses market-based measures such as stock prices
and volatility?
a) Merton's model
b) Altman's Z-score
c) KMV model
d) Black-Scholes model
16. In credit analysis, the term "covenant" refers to:
a) A legal agreement between a borrower and lender
b) A financial ratio used to assess liquidity
c) A credit rating assigned by a credit rating agency
d) An industry classification code
17. Which of the following is NOT typically considered a leading indicator of financial
distress?
a) Declining profit margins
b) Increasing debt-to-equity ratio
c) High return on equity
d) Decreasing cash flow
18. Which financial ratio is commonly used in credit analysis to assess a company's
leverage?
a) Return on Assets
b) Debt-to-Equity ratio
c) Price-to-Earnings ratio
d) Current ratio
19. Which of the following is a limitation of distress prediction models?
a) They are too complex to implement
b) They cannot accurately predict distress in all cases
c) They rely solely on qualitative factors
d) They are only applicable to publicly traded companies
20. Which of the following is NOT a step in the credit analysis process?
a) Assessing the borrower's credit history
b) Evaluating the borrower's income level
c) Analyzing the borrower's financial statements
d) Setting interest rates based on market conditions
ANSWERS
1. b) Evaluating the creditworthiness of borrowers
2. d) Political affiliations
3. c) Predict the likelihood of a company experiencing financial distress
4. b) Evaluating the probability of bankruptcy for companies
5. b) Market capitalization
6. c) Both quantitative and qualitative factors
7. b) Current ratio
8. c) They provide a binary outcome - distressed or not distressed
9. d) A company's ability to generate enough cash flow to cover its debt payments
10. c) Management quality
11. b) The Altman Z-score
12. b) Lenders and creditors
13. b) To estimate the likelihood of a borrower defaulting on its debt obligations
14. d) It helps lenders make informed decisions about extending credit
15. c) KMV model
16. a) A legal agreement between a borrower and lender
17. c) High return on equity
18. b) Debt-to-Equity ratio
19. b) They cannot accurately predict distress in all cases
20. b) Evaluating the borrower's income level