CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
A credit analyst is evaluating a corporate issuer's capacity to pay. Which of the following industry characteristics would most likely indicate lower credit risk?
Strong, stable demand combined with high barriers to entry most likely indicates lower credit risk. Predictable demand supports steady cash flow, and high barriers limit new competitors and protect margins. High cyclicality and low barriers to entry both make cash flows less reliable and so raise credit risk.
- AHigh cyclicality of demand
- BLow barriers to entry
- CStrong, stable demand with high barriers to entryCorrect
Explanation
Stable demand makes cash flows more predictable, and high barriers to entry limit competition and protect margins. Cyclical demand makes cash flows volatile, and low barriers to entry invite competitors, which weakens pricing power. Both raise credit risk.
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