Question

DQ #1 There are three major Financial Ratings Agencies. Are the factors used to assess a company's rating the

same for each of the three agencies?

DQ #2 Imagine that you are a chief financial officer with $150,000 of idle cash that you must invest to increase

earnings for your company. Select one company and two ratios you would use to determine your

investment strategy. Briefly explain why you chose the ratios.

DQ #3 What would be the implications to a company if the ratings changed?

  STUPID ACCOUNTING RULES!!!!!

I may have to postpone my retirement until I die. My financial situation has been in decline after some

poor investments. About two years ago Berkshire Hathaway reported a first quarter net loss of $1.1 billion

or $692 per class A share.   

Why? An accounting change required Berkshire to report $6.2 billion of unrealized losses in its marketable

securities portfolio.

DQ #4 Try to explain to a non-accountant what unrealized losses or gains are. I should have placed my savings under a rock in my yard!!

Answer 1

DQ #1 There are three major Financial Ratings Agencies. Are the factors used to assess a company's rating the

same for each of the three agencies?

The Big three cfrdit agencies arre standard & Poor (S&P) , Moody’s and Fitch Group.S&P and Moody’s are based in the US and Fitch is dual headquarter New York and London

A credit rating is quantified assessment of the creditworthiness of a borrower in general terms .

A credit rating not only determines whether or not a borrower will be approved for a loan or debt issue but alos determine the Interest rate at which the loan will need to be repaid

Moody’s issued publicly available credit ratings for Bonds in 1909.and other agencies followed suit in the decade after .

Fitch provided financial statistics for use in Investment industry via “ the Fitch Stock nd Bind Manual “ . Fitch began to develop operating subsidiaries specializing in enterprise risk management , data service ,

Moody’s Investor service , which in the following 10 years , would provide ratings for nearly all of the government bond market .

S&P – They best known by indexes such as the S&P 500, a stock market index that is both a tool for investor analysis and decision making and US economic indicator

All rating agencies must take a balanced and objective view of the borrowers financial situation and capacity to service / repay debt.

DQ #2 Imagine that you are a chief financial officer with $150,000 of idle cash that you must invest to increase

earnings for your company. Select one company and two ratios you would use to determine your

investment strategy. Briefly explain why you chose the ratios.

Investment of Idle cash ( $ 150,000) into company who will give return in future . While Investing , need to look into companies performance .As CFO need to look into :

1. Solvency ratio – Movement of current asset and Current Liability . Position of Working capital . At least last 5 year trend of Working capital position need to analysis .
2. Return on Investment / Capital Employed / Equity – Most important ratio to look into at the time of Investment . This ratio will help to understand companies Equity position , total asset position , new capex plan and yearly return generated by company .

DQ #3 What would be the implications to a company if the ratings changed?

  STUPID ACCOUNTING RULES!!!!!

I may have to postpone my retirement until I die. My financial situation has been in decline after some

poor investments. About two years ago Berkshire Hathaway reported a first quarter net loss of $1.1 billion

or $692 per class A share.    

Why? An accounting change required Berkshire to report $6.2 billion of unrealized losses in its marketable

securities portfolio.

A Company’s corporate credit rating indicates its relative ability to pay its creditors and gives investor an idea of how the company’s debt securities should be priced in term of yields . Companies credit ratings trend , over time , amy allow an investor to compare teh credit worthiness of competition corporations

Any change in credit rating will impact companies borrower and Investor plan . On the basis if rating , Investor do “ risk analysis “ of any companies . Normally AAA rated company with lowest risk , BBB represents Medium risk and D rating represents Junk grade and fall under default category

Main reason for Berkshire Hathaway Reported a forst quarter loss of $ 1.1 billion mainly due to change in Accounting rules after financial crisis. As per FASB , standard ASU 2016-01, Recognition and Measurement of financial assets and liabilities .

As per new rule , that Equity Investment must be measured at Fair value

With changes to that fair value recognised as part of net Income . if fair value not readily available , an entity may elect to measure equity Investment at cost less impairment loss plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.

Why Berkshire Hathaway comoany badly impacted ? – they have own $ 170 billion of marketable stocks and the value of these holdings can easily swing by $ 10 billion or more with in Quarterly reporting .

Mainly adjust an Investment previously carried at cost to its fair value and impact on unrealized gain / losses on bottom line

DQ #4 Try to explain to a non-accountant what unrealized losses or gains are. I should have placed my savings under a rock in my yard!!

Unrealized gain / loss reflects rises and declines in Investment .

A gain or loss becomes realized when the investment is actually sold

Capital gain are taxed only when they are realized . capital Loss can be deducted only when they are realized

Unrealized gain and losses are nothing but “ Paper gain/loss “

Unrealized gain /loss are the amount individual are either up or down on the securities purchased but not yet sold . Unrealised gain / loss do not affect until no one actually sell the security and thus realised gain/ loss