Credit Risk and Cash Flow Volatility
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The quarterly cash flows from operations for two software companies are
Firm A
Q1 $406.1
Q2 $204.2
Q3 $729.1
Q4 $440.2
Q1 $587.8
Firm B
Q1 $136.7
Q2 $243.1
Q3 $708.2
Q4 $(87.9)
Q1 $(161.4)
1. Explain why Firm B has more credit risk than Firm A.
2. Suppose that Firm B's cash flow was $200 higher each quarter. Explain why Firm B might still be judged to have higher credit risk than Firm A.
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Solution Summary
This solution explains why one firm has more credit risk than another.
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1. Explain why Firm B has more credit risk than Firm A.
According to RiskGlossary, "Credit risk is risk due to uncertainty in a counterparty's (also called an obligor's or credit's) ability to meet its obligations." Credit risk is risk which arise ...
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