Deck 14: Evaluating Commercial Loan Requests and Managing Credit Risk

Question 1

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.

Answer 1

C

Question 2

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.

Answer 2

D

Question 3

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%

Answer 3

B

Question 4

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.

Question 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.

Question 6

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.

Question 7

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

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

Use the following information on Dylan Enterprises for questions

What were Dylan's cash receipts during the year?

A)$307,000,000
B)$320,000,000
C)$323,000,000
D)$424,000,000
E)$482,000,000

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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%

Question 16

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

Question 17

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.

Question 18

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

Question 19

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.

Question 20

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.

Question 21

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.

Question 22

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

Question 23

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

Question 24

Use the following information on Dylan Enterprises for questions

What is Dylan's current ratio for the current year?

A)1.36
B)1.44
C)1.58
D)1.68
E)1.71

Question 25

Use the following information on Dylan Enterprises for questions

What is Dylan's cash flow from operations?

A)-$2,874,000
B)$8,126,000
C)$12,210,000
D)$19,126,000
E)$23,210,000

Question 26

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

Question 27

Use the following information on Dylan Enterprises for questions

What is Dylan's return on equity for the current year?

A)3.8%
B)5.1%
C)5.4%
D)12.6%
E)13.3%

Question 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.

Question 29

Use the following information on Dylan Enterprises for questions

What is Dylan's equity multiplier for the current year?

A)0.30
B)0.63
C)1.52
D)2.67
E)3.33

Question 30

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

Question 31

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

Question 32

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

Question 33

Use the following information on Dylan Enterprises for questions

What is Dylan's return on assets for the current year?
A)13.3%

A)3.8%
B)5.1%
C)5.4%
D)12.6%

Question 34

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

Question 35

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

Question 36

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.

Question 37

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

Question 38

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

Question 39

Use the following information on Dylan Enterprises for questions

Next year, sales at Dylan are expected to increase by 10%.Also next year, the dividend payout ratio will not change, while gross profit, operating profit, net income, current assets and current liabilities will be the same percentage of sales as the current year.If the firm issues no new common stock, what will be the addition to retained earnings next year?

A)$1,112,000
B)$2,746,200
C)$3,200,000
D)$4,884,000
E)$5,372,400

Question 40

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.

Question 41

Discuss which is more expensive for a bank: Extending credit to a customer who ultimately defaults, or denying credit to a customer who would have paid the bank back.

Question 42

Pro forma analysis is a form of sensitivity analysis.

Question 43

Can a firm continue to operate for extended periods of time with negative cash flows from investing? Cash flows from financing? Cash flows from operations? Why or why not?

Question 44

Why is it important to compute pro forma common size balance sheets and income statements when evaluating a commercial loan?

Question 45

What are the five generally accepted credit events that can trigger a payment from the seller of a credit default swap to the buyer?

Question 46

Explain how an increase in days inventory on hand and an increase in days accounts payable outstanding would impact a firm's operating cash flow.

Question 47

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

Question 48

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

Question 49

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

Question 50

Explain how sensitivity analysis assists in evaluating commercial loan requests.