Question 1

A bank that wants to examine the operating efficiency of a borrower would most likely examine which of the following ratios?

Accepted Answer

The cost of goods sold ÷ average inventory ratio, also known as inventory turnover, measures how efficiently a company manages its inventory, which is a key component of operating efficiency.

Question 2

A bank wants to examine whether the borrower can raise cash in a timely fashion to pay bills that are coming due.This bank would most likely examine which of the following categories of ratios?

Accepted Answer

The bank would most likely examine the customer's liquidity ratios, which measure the borrower's ability to meet short-term obligations. Liquidity ratios include current ratio, quick ratio, and cash ratio, which all indicate whether the borrower has enough cash or liquid assets to cover upcoming bills and expenses.

Question 3

Which dimension of a business firm's financial and operating performance,would unfunded pension liabilities fit best?

Accepted Answer

Unfunded pension liabilities represent a potential future expense and are considered a contingent liability for the business firm.

Question 4

When analyzing a commercial loan credit request,which of the following statements is (are)correct?

Accepted Answer

All of the options are correct when analyzing a commercial loan credit request. Checking the qualifications of the borrowing firm's management, evaluating potential expenses to service the loan, checking for adequate insurance coverage, and considering market demand trends are all important factors in assessing the creditworthiness of the borrower and the potential risk associated with the loan. Therefore, all the given options are correct.

Question 5

Under court interpretation of the Comprehensive Environmental Response,Compensation,and Liability Act,lenders may be liable for clean-up costs of hazardous substances if:

Accepted Answer

According to court interpretation of the Comprehensive Environmental Response, Compensation, and Liability Act, lenders may be liable for clean-up costs of hazardous substances if they are involved in managing property with hazardous wastes, have a strong association with the property owner, or have treated the interest in the borrower's property as a long-term investment. Therefore, since all the options listed are correct, the best choice is D.

Question 6

The term of an inventory loan is being set to match the exact length of time needed to generate sufficient cash to repay the loan.What type of loan is this?

Accepted Answer

The loan described is a self-liquidating inventory loan, as it is designed to be repaid from the proceeds generated by the sale of the inventory. The term of the loan is set to match the time needed to sell the inventory and generate enough cash to repay the loan. This type of loan is commonly used by businesses to finance their inventory needs without creating a long-term debt burden.

Question 7

A bank that is examining the ratio of overhead expenses to net sales,is examining which category of ratios?

Accepted Answer

Expense control measures focus on how well a company manages its expenses relative to its sales, which is what the ratio of overhead expenses to net sales evaluates.

Question 8

When analyzing the financial statements of a business,a credit analyst will look for ratios in which of the following categories?

Accepted Answer

Bankers will typically look for ratios in all four categories - profitability, coverage, operating efficiency, and liquidity - as they provide a comprehensive picture of the financial health of a business. Profitability ratios help indicate how well a business is generating profits, coverage ratios reveal its ability to meet its financial obligations, operating efficiency ratios provide insights into how efficiently the business is using its assets, and liquidity ratios show how easily the business can meet its short-term obligations.

Question 9

Which dimension of a business firm's financial and operating performance would the gross profit margin fit best?

Accepted Answer

The answer of Which dimension of a business firm's financial...

Question 10

A bank that is examining the ratio of annual costs of goods sold to average inventory,is examining which category of ratios?

Accepted Answer

Ratios that examine the relationship between the cost of goods sold and inventory are operating efficiency measures. These ratios help to evaluate how efficiently a company is using its resources to generate sales.

Question 11

Recent federal guidelines put in place by the Federal Deposit Insurance Corporation require banks to develop written procedures to protect against loss from environmental damage.These procedures are known as the:

Accepted Answer

The recent federal guidelines introduced by the Federal Deposit Insurance Corporation require banks to develop written procedures to protect against loss from environmental damage. These procedures are known as the environmental risk assessment program.

Question 12

A security dealer requires credit to add new government securities to his security portfolio.What type of loan is this?

Accepted Answer

This is a type of loan specifically designed for security dealers to finance the purchase of new securities for their portfolio. It provides the necessary credit for the dealer to acquire new investments and expand their offerings to customers.

Question 13

Banks frequently bid on the opportunity to finance the entire inventory of dealers selling automobiles,business and electronic equipment,and other durable goods through a ___________ arrangement.

Accepted Answer

Floor planning is a financing arrangement where banks finance the inventory of dealers selling durable goods such as automobiles, business and electronic equipment, and other goods. In this arrangement, the dealers use their inventory as collateral for the loan, and the bank takes a lien on the inventory. As the inventory is sold, the dealers repay the loan and the bank releases the lien. This arrangement is a common practice in the retail industry, as it allows dealers to have access to cash flow to purchase new inventory and maintain their business operations.

Question 14

Term loans normally are secured by:

Accepted Answer

Term loans are generally long-term loans that require collateral to secure the loan. The most common form of collateral used to secure term loans is fixed assets, such as real estate, equipment, or machinery. This provides the lender with a form of security in case the borrower defaults on the loan.

Question 15

Credit is extended to a company up to one year to purchase raw materials and cover a seasonal peak need for cash.What type of loan is this?

Accepted Answer

This is a working capital loan, which is designed to provide short-term funds for operational needs such as purchasing raw materials and covering seasonal cash flow fluctuations.

Question 16

A business receives a three year line of credit against which it can borrow,repay,and borrow again if necessary during the loan's three year term.What type of loan is this?

Accepted Answer

A revolving credit financing allows a borrower to repeatedly borrow and repay funds during the term of the loan. In this case, the business is able to borrow, repay, and borrow again over the three-year term, making it a revolving credit financing.

Question 17

A bank that is examining the ratio of total liabilities to total assets,is examining which category of ratios?

Accepted Answer

The ratio of total liabilities to total assets is a measure of leverage, which indicates the bank's ability to meet its debt obligations. This ratio is a leverage measure, which evaluates the extent to which the bank is financed by debt rather than equity.

Question 18

A loan or line of credit extended to a business by a group of lending institutions in order to reduce the risk exposure is known as:

Accepted Answer

A syndicated loan is a loan or line of credit extended to a business by a group of lending institutions, with each lender sharing the risk exposure. This type of loan is most commonly used for large projects that require a significant amount of capital. The lending institutions work together to provide the funding, with one serving as the lead lender and the others participating in the funding. This reduces the risk for each lender and allows them to provide larger loans than they might be able to on their own. Option D is therefore the best choice.

Question 19

The most common sources that lenders look to for repayment of business loans include all of the following except:

Accepted Answer

Lenders typically do not consider goodwill as a reliable source for repayment of a business loan. Goodwill refers to the intangible assets of a business such as its reputation, brand, and customer relationships. While these factors may contribute to a business's success, they cannot be easily quantified or sold to repay a loan. The other options, including the borrower's cash flow, assets pledged as collateral, and the borrower's net worth, are commonly used by lenders to assess the borrower's ability to repay a loan.

Question 20

A bank that wants to examine the liquidity of a borrower would most likely examine which of the following ratios?

Accepted Answer

The current ratio, which is calculated as current assets divided by current liabilities, is a measure of liquidity. It indicates a borrower's ability to meet its short-term obligations. A higher current ratio indicates better liquidity, while a lower ratio indicates greater risk of default.

Quiz 17: Lending to Business Firms and Pricing Business Loans