Answer: d. All are correct
Explanation: Even though forecasting is an inexact science - probably more of an art than science - it is a necessary task to determine credit-worthiness of a firm. To create a reasonable idea as to the creditworthiness of a firm, an analyst will likely perform ratio analysis, so that:_________
I. The analyst can see if the company is consistent in its performance.
II. The analyst can determine if there are good trends (i.e., improving margins), or bad trends (i.e., increased inventory turnover).
III. The analyst can identify liquidity or cash flow weaknesses and strengths.
IV. The analyst can determine if the firm will have sufficient collateral and free cash flow to support loan payments.
Select one: a. Only I and IV are correct
b. Only I, III, and IV are correct
c. Only I, II, and IV are correct
d. All are correct
e. None are correct.
Forecasting in a simple term means estimating how something will be in the future. It uses historical data as inputs to make informed estimates on future events or trends. While forecasting is useful in allocation of budgets in businesses, analysts apply it to see if a business is consistent with its performance, in the determination of trends (good or bad) in order to reduce or avoid risks. It is also useful in the determining if the business will have sufficient collateral and free cash flow to support loan payments and in identifying liquidity or cash flow weaknesses and strengths.
