CAS Exam 9 Spring 2018, Question 10
Study guide: Exam 9
An investor is deciding between investing in the bonds issued by two companies operating in the same industry using the information listed below:
| Company A | Company B | |
|---|---|---|
| Revenue | $20 million | $50 million |
| Interest Expense | $2 million | $5 million |
| Earnings before interest, taxes | $4 million | $7 million |
| Assets | $10 million | $25 million |
Part a (1 point)
Based on the companies' financials listed above, use two financial ratios to identify the company that is less likely to default.
Part b (0.5 points)
Briefly describe two protective covenants that can be added in the bond contract that will reduce loss to the investor when either company A or B default.
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