CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
In the four Cs framework of corporate credit analysis, which of the following is most likely classified under "capacity"?
Capacity refers to the issuer's ability to generate enough cash flow to service its debt on time. Covenants and collateral are separate Cs in the framework, so they do not describe capacity, which depends on operating performance and cash generation.
- AThe issuer's ability to generate cash flow to service its debtCorrect
- BThe restrictive terms written into the bond indenture
- CThe quality of the issuer's collateral pledged to lenders
Explanation
Capacity is the borrower's ability to make timely debt payments from operating cash flow. Covenants are a separate C, and collateral is a third C. The distractors describe those other Cs, not capacity.
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