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CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers

Two issuers in the same industry have equal EBITDA. Issuer X has a lower ratio of retained cash flow to net debt than Issuer Y. All else equal, the analyst would most likely conclude that Issuer X has:

Issuer X most likely has weaker capacity to repay debt from internally generated cash. A lower retained cash flow to net debt ratio means less cash is available after dividends relative to net debt, which signals weaker credit quality than Issuer Y.

  1. Agreater capacity to repay debt from internally generated cash
  2. Bweaker capacity to repay debt from internally generated cashCorrect
  3. Ca lower financial leverage than Issuer Y

Explanation

Retained cash flow to net debt measures how much of net debt could be repaid from cash flow kept after dividends. A lower ratio means less internal capacity to repay debt, indicating weaker credit quality. It does not indicate lower leverage.

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