Reference no: EM132631151

Problem 1) Companies like the Estee Lauder Companies Inc often borrow money to fund operating activities. Why do lenders distinguish between cyclical cash needs and cash needed to fund operating losses?

Problem 2) Explain how a company's need of cash for investing activities differs over that company's life cycle. Suggest three reasons a company would borrow cash for financing activities.

Problem 3) Distinguish between a line of credit and a letter of credit. Why do companies like the Estee Lauder Companies Inc. obtain lines of credit?

Problem 4) What is credit risk? What is the main purpose of performing a credit analysis?

Problem 5) What are the four steps to assess the chance of default for a company? Where does Estee Lauder stand on this?

Problem 6) What two factors determine a company's level of credit risk? Explain what each factor tries to measure.

Problem 7) Why do lenders impose debt covenants on borrowers? Explain the three types of debt covenants.

Problem 8) With respect to bankruptcy prediction, what is a Type I error? A Type II error? If you are a creditor, which type of error is more costly to you? Why?