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1. Explain how you would rank the 5 C’s of credit analysis in order of importance and explain your rankings?
2. What are the most important covenants for creditors to include in loan agreements with borrowers and why?
3. There is a fundamental flaw in the credit rating agency process – the issuer of securities pays for the rating? How can this fundamental flaw be repaired going forward and why is that the best solution compared to other alternatives?
4. If you were the CEO of a financially-troubled company, what changes would you make in the operating and financial strategies to avoid bankruptcy and improve future performance?
5.Why and how do we determine a company's cost of capital and why is it important to a company?
Please list sources/references
Explanation & Answer
Attached.
Running head: ACCOUNTING
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Accounting
Name
Institutional Affiliation
ACCOUNTING
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Accounting
Five C’s of Credit Analysis
In an attempt to mitigate lending risks, financial institutions perform credit analysis on
applicants. The process entails a review of five fundamental factors that predict the likelihood of
a borrower to default (Baiden, 2011). The five C’s of credit include conditions, capacity,
character, capital, and collateral. There are different measures of the five C’s either based on
qualitative or quantitative means. The five C’s vary on importance and can be ranked as follows:
i.
Capacity-it is imperative that the borrower is reviewed on the ability to pay a loan
on the basis of the proposed amount and terms (Baiden, 2011). For instance,
capacity can be ascertained based on a borrower’s income, for example, cash flow
statements for business and stability of employment for individuals.
ii.
Conditions are the terms of a loan and the economic conditions that might impact
the borrower. It is crucial that as a lender, the conditions of the economy are
reviewed for the purpose of ...
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