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    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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    https://brainmass.com/business/credit-management-credit-policy-analysis-and-risk/credit-risk-cash-flow-volatility-464302

    Solution Preview

    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 ...

    Solution Summary

    This solution explains why one firm has more credit risk than another.

    $2.19