CFA Level I · CFA Level I Exam · Credit Risk
When assessing a corporate borrower's capacity, which of the following is the analyst most likely to evaluate?
Capacity analysis most likely evaluates the stability of operating cash flow relative to debt service obligations, along with leverage and coverage. Bond ranking relates to seniority and collateral, and dividend restrictions are covenants, so they belong to other Cs.
- AThe ranking of the bond in the issuer's capital structure
- BThe stability of operating cash flow relative to debt service obligationsCorrect
- CThe presence of a restriction on dividend payments in the indenture
Explanation
Capacity is the ability to service debt, assessed through cash flow stability, leverage and coverage, industry position and competitive strength. Ranking in the capital structure relates to collateral and seniority, and dividend restrictions are covenants.
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