14 - Evaluating Commercial Loan Requests And Managing Risk

Front 1

1. Firms may need cash for all of the following except:
a. operating purposes.
b. pay taxes.
c. pay employee salaries.
d. pay overdue suppliers.
e. liquidate fixed assets.

Back 1

e

Front 2

2. All of the following would be generally be considered acceptable commercial loan purposes except:
a. seasonal cash needs.
b. paying off other bank debts.
c. purchasing new equipment.
d. acquiring another firm.
e. expanding plant capacity.

Back 2

b

Front 3

3. Which of the following is not one of the essential issues in evaluating commercial loan requests?
a. The structure of the borrower’s board of directors.
b. The character of the borrower.
c. The use of the loan proceeds.
d. The source of repayment for the loan.
e. The amount the customer needs to borrow.

Back 3

a

Front 4

4. Short-term working capital loans are generally repaid with funds from:
a. investing cash flows.
b. issuing new debt.
c. reductions in inventory and receivables.
d. issuing new equity
e. redeeming marketable securities.

Back 4

c

Front 5

5. Term loans are generally repaid with funds from:
a. investing cash flows.
b. issuing new debt.
c. reductions in inventory and receivables.
d. cash flows from operations.
e. redeeming marketable securities.

Back 5

d

Front 6

6. All of the following are basic sources of cash flows except:
a. liquidating assets.
b. cash flows from operations.
c. issuing new equity.
d. liquidating liabilities.
e. issuing new debt.

Back 6

d

Front 7

7. Which of the following characteristics should collateral have?
a. The value of the collateral should not exceed the value of the loan.
b. The collateral should be highly liquid.
c. The lender must be able to perfect a lien on the collateral.
d. a. and b. only.
e. b. and c. only.

Back 7

e

Front 8

8. Why is liquidating collateral not a preferred means of loan repayment?
a. The bank must manage the repossessed collateral until it is sold.
b. Transaction costs on liquidating collateral are often quite high.
c. Bankruptcy laws may prevent liquidation to occur in a timely manner.
d. All of the above.
e. b. and c. only

Back 8

d

Front 9

9. Which of the following is not part of the four-stage process for evaluating the financial aspects of commercial loans?
a. An analysis of the firm’s management, operations, and industry.
b. Performing financial ratio analysis.
c. Analyze the firm’s cash flow.
d. Examining the backgrounds of the sales force.
e. Project the borrower’s financial condition.

Back 9

d

Front 10

10. Common size financial statements convert figures to a common size by:
a. dividing balance sheet items by total assets and income statement items by net income.
b. dividing balance sheet items by sales and income statement items by net income.
c. dividing balance sheet items by total assets and income statement items by sales.
d. dividing balance sheet items by sales and income statement items by total assets.
e. dividing balance sheet items by total equity and income statement items by sales.

Back 10

c

Front 11

11. How efficiently a firm is using its assets is measured by:
a. liquidity ratios.
b. market value ratios.
c. profitability ratios.
d. activity ratios.
e. leverage ratios.

Back 11

d

Front 12

12. A firm’s mix of debt and equity is measured by:
a. liquidity ratios.
b. market value ratios.
c. profitability ratios.
d. activity ratios.
e. leverage ratios.

Back 12

e

Front 13

13. A firm’s ability to meet its short-term debt obligations is measured by:
a. liquidity ratios.
b. market value ratios.
c. profitability ratios.
d. activity ratios.
e. leverage ratios.

Back 13

a

Front 14

14. Which financial ratio measures a firm’s ability to pay current interest and lease payments with current earnings?
a. Fixed charge coverage ratio
b. Return on equity
c. Current ratio
d. Inventory turnover
e. Debt to total assets ratio

Back 14

a

Front 15

15. A firm has the following financial statement data: Sales = $1,000, COGS = $400, Operating Expenses = $200, and Taxes = $200. What is the firm’s profit margin?
a. 10%
b. 20%
c. 30%
d. 40%
e. 60%

Back 15

Answer: b
Profit Margin = Net Income/Sales = ($1,000 - $400 - $200 - $200)/$1,000 = .20

Front 16

16. A firm has the following financial statement data: Sales = $2,000, COGS = $800, Operating Expenses = $600, and Taxes = $400. What is the firm’s profit margin?
a. 10%
b. 20%
c. 30%
d. 40%
e. 60%

Back 16

a

Front 17

17. Cash flows from a firm’s normal business activities are reflected in:
a. cash flows from investing.
b. cash flows from financing.
c. cash flows from operations.
d. cash flows from income.
e. cash flows from budgeting.

Back 17

c

Front 18

18. All of the following are sources of cash except:
a. an increase in long-term debt.
b. a decrease in inventory.
c. a new equity issue.
d. a decrease in notes payable.
e. an increase in accounts payable.

Back 18

d

Front 19

19. Which of the following is not a use of cash?
a. A decrease in accounts payable
b. An increase in inventory
c. An increase in accounts receivable
d. The payment of cash dividends
e. An increase in wages payable

Back 19

e

Front 20

27. The change in Net Fixed Assets equals:
a. capital expenditures minus depreciation.
b. capital expenditures plus depreciation.
c. capital expenditures minus cash flow from operations.
d. Gross fixed assets minus depreciation.
e. Gross fixed assets minus cash purchases.

Back 20

a

Front 21

28. At a minimum, cash flow from operations should cover:
a. interest on long-term debt.
b. dividends plus mandatory principal payments on debt.
c. capital expenditures plus dividends.
d. the change in marketable securities.
e. dividends plus interest.

Back 21

b

Front 22

29. Under which category are dividends classified on the statement of cash flows?
a. Cash From Investing Activities
b. Cash From Operating Activities
c. Cash From Financing Activities
d. Cash From Profit Activities
e. None of the above

Back 22

c

Front 23

30. Which of the following would cause a firm's ROE to be high, but its ROA to be low?
a. A low gross profit margin but a high net profit margin.
b. Financing a relatively large proportion of assets with equity.
c. Paying very low interest rates on the firm's debts.
d. Leasing a large amount of equipment.
e. Financing a relatively large proportion of assets with debt.

Back 23

e

Front 24

31. A firm's borrowing base is:
a. based on cash flow from operations.
b. a measure of long-term profit potential.
c. the amount of the firm's unused credit.
d. an estimate of the available collateral on a company's current assets.
e. a measure of net fixed assets.

Back 24

d

Front 25

32. Many banks have changed their business model to a _____________ model.
a. originate-to-keep
b. originate-to-service
c. originate-to-pay
d. originate-to-lead
e. originate-to-distribute

Back 25

e

Front 26

33. In loan participations, the _____ makes the original loan and sells participations.
a. lead bank
b. interbank
c. loan production office
d. holding firm
e. originate bank

Back 26

a

Front 27

34. Which of the following is NOT a type of credit enhancement?
a. Excess cash flow
b. Credit derivatives
c. Loan guarantees
d. All of the above are a type of credit enhancements
e. a. and b. are NOT credit enhancements

Back 27

d

Front 28

35. Many bankers focus on eliminating the error of denying a loan to a customer who ultimately would repay the debt.

36. A borrower making a changing their accountant could be viewed as a negative signal regarding the borrower's condition.

Back 28

False

True

Front 29

37. Financial statements that have been audited are guaranteed to be 100% accurate.

38. A firm generally should not count on collateral as the primary source of payment.

Back 29

False

True

Front 30

39. Common size ratio comparisons enable comparisons across firms in the same industry.

40. Every balance sheet and income statement item must be recognized on a cash-based income statement.

Back 30

True

True

Front 31

41. Negative cash flow will automatically eliminate the possibility that a bank will loan a firm funds.

42. On the cash-based income statement, depreciation is a source of funds.

Back 31

False

True

Front 32

43. A low days inventory on hand and a high inventory turnover relative to industry norms indicates less efficient inventory management and/or more liquidity.

44. Pro forma analysis is a form of sensitivity analysis.

Back 32

False

True