1.

Discuss how creditors can benefit from the financial analysis of

institutional borrowers. Support your discussion with an example.
- Creditors can benefit from the financial analysis of institutional borrowers by
having collateral like homes and cars on secured loans, and take debtors to
court over unsecured debts. Also, they can raise interest rates or fees to the
borrower's creditworthiness and past credit history.
- E.g., Creditors often charge interest on the loans they offer their clients, such
as a 5% interest rate on a $5000 loan. The interest represents the borrower's
cost of the loan and the creditor's degree of risk that the borrower may not
repay the loan.

2. Explain how profitability ratios can be used as a basis for credit policies.
Give two examples.
- Profitability ratios measure the ability of the company to generate profit
relative to revenue, balance sheet assets, and shareholders’ equity. It is
important to investors, as they can use it to help project whether stock prices
are likely to appreciate. They also help lenders determine the growth rate of
corporations and their ability to pay back loans.
- E.g., Return on Assets. Profitability is assessed relative to costs and
expenses and analyzed in comparison to assets to see how effective a
company is deploying assets to generate sales and profits. The use of the
term "return" in the ROA measure customarily refers to net profit or net
income, the value of earnings from sales after all costs, expenses, and taxes.
- E.g., Return on Equity. ROE is a key ratio for shareholders as it measures a
company's ability to earn a return on its equity investments. ROE, calculated
as net income divided by shareholders' equity, may increase without
additional equity investments. The ratio can rise due to higher net income
being generated from a larger asset base funded with debt.

3. Explain which credit ratio is very much significant in determining a firm's

ability to pay interest charges. Use your own example to clarify your point.
- Debt service coverage ratio. It is the ability of a company to pay all debt
obligations, including repayment of principal and interest. It is the most
significant in determining the firm’s ability to pay interest charges because it is
commonly used metric when negotiating loan contracts between companies
and banks.
- E.g., A business applying for a line of credit might be obligated to ensure that
their DSCR does not dip below 1.25. If it does, the borrower could be found to
have defaulted on the loan. In addition to helping banks manage their risks,
DSCRs can also help analysts and investors when analyzing a company's
financial strength.