What information in a credit agency report can help a bank assess a company’s management integrity?

c)How freely the management shares information.

a)Opinion about the company management.

b)Information about the financial performance.

d)Details on covenant compliance for the bank loans.

Which is likely to be false of a company with a low gearing ratio?

c)It has high repayment ability.

d)It has a high repayment obligation.

What is the starting point in the process of projecting a business’s financial performance?

d)Review historic levels of the risk drivers.

b)Complete sensitivity analysis.

c)Project future values for the risk drivers.

What governing body for the Insolvency and Bankruptcy Code would set up accreditation for insolvency professionals and information utilities?

Insolvency and Bankruptcy Board of India.

Insolvency Professional Agency.

Which factor will decrease a buyer’s market risk in the long term in conditions where the supplier has high bargaining power?

Availability of substitute products in the market.

Increase in supplier’s market share.

High demand skilled workers are employed by the supplier.

In which condition can a local business perform well while the local economy is in recession?

b)The business has a high profit margin.

c)The business sells high quality and durable products.

d)The local economy of business’s customers is thriving.

What general inference can be made about a company that has positive cash flow from operations, and that is borrowing and investing?

It is acquiring other companies.

Which action by a borrower’s management could have an adverse effect on its cash flow and ability to meet its obligations?

Increasing the rate of depreciation resulting in reduced net income.

Adopting a conservative financing strategy.

Executing plans to ensure short-term goals are met.

Disclosing information to other stakeholders on need to know basis.

Which action might a company take when it is in the cash concern stage of financial distress?

d)Eliminating management positions.

What is the primary reason for reviewing external information when assessing a company’s credit quality?

To evaluate what developments may create opportunities for the company or adversely affect its performance.

To evaluate any adverse press coverage of the company.

To assess the company’s vulnerability to natural disasters.

To review any gradual economic changes that may affect the company’s industry.

What is the difference between a partnership firm and a Limited Liability Partnership (LLP)?

An LLP is a separate legal entity from its members and a partnership is not a separate legal entity.

An LLP is governed by the Indian Partnership Act and a partnership firm is governed by the Companies Act.

If a partner dies a partnership firm continues to exist and an LLP dissolves.

The income from a partnership firm stays within the firm and LLP income is personal income for the partners.

which financial trigger can be set up internally as an early signal of a borrower’s probability of default?

c)Unexpected change in dividend policy.

a)Change in profit projections.

b)Change in ownership structure.

d)Emergence of new competitive entrants in the market.

What information should be reviewed in the periodic progress reports on implementation of a project to assess likelihood of meeting the loan repayment obligations?

The project implementation is on schedule.

There are orders for the project outputs once completed.

Funding is available to cover any cost overruns.

Project reports have been approved by the lender’s engineer

Which is the best description of the gearing ratio?

An indication of how a business’s assets are funded between owners and creditors.

An indication of current assets to current liabilities.

An indication of net worth compared to total assets.

An indication of how much cash is available to cover payments.

What external factors outside of a business’s control can affect its liquidity levels?

d)Management and key persons’ risk.

Which proposition is least likely to be considered for a term loan for its financing requirements?

Daily working capital requirements for a small business.

Expansion of a fleet of vehicles.

Capital expenditure for a power plant.

An instalment financing construction project.

Why is management integrity the most critical factor when assessing the impact of management risk on a company’s credit risk?

A lack of integrity can result in a company using cash flows for purposes other than interest or loan payments.

A positive assessment of management integrity is necessary for a lender to be confident in the reliability of the information provided by the company.

Management lacking integrity may prioritise payments to other external stakeholders.

A lack of integrity can result in a company’s underperformance and subsequent inability to meet its payment obligations.

Which organisational structure can inhibit management’s ability to take decisions thus adversely affecting the company’s performance and credit risk?

A centralised decision-making process.

A structure that has distinct divisions between different functions.

A structure in which roles and responsibilities are clearly documented.

Why does a special purpose vehicle expose a lender to more risk than conventional financing?

The loan is repaid only from the project’s cash flows.

The loan has no security guaranteed.

The sponsor has no established track record.

The sponsor is the only party liable for the loan.

Which factor can be excluded from the cost analysis during the pricing decision process?

External financial market conditions.

The borrower’s total business with the bank.

The borrower’s past and current financial performance.

The bank’s minimum returns requirements for the transaction.

which element in the development of a business plan would indicate a high degree of management risk?

Finalisation of the business plan only a few days before the start date.

Set business objectives are easy to meet.

Reports on progress implementation are often late.

No consultation with stakeholders in setting up the plan.

XYZ trucking company (XYZ) has recently entered into an arrangement with an online sales business to deliver their general consumer goods and expect that this partnership will improve their sales. XYZ has sought enhanced financing to support this new business. The transportation industry is in a decline due to a recession, and XYZ’s most recent annual financial statement shows relatively weak sales performance. What is the next step in assessing XYZ’s credit application?

The assessment should continue with more focus on the sales projections scenarios and cash flow impact.

The assessment should end, and credit should be declined.

The assessment should be postponed until the industry enters the recovery stage.

The assessment should continue and focus on total profit as a measure of success.

What is the primary purpose of calculating drawing power in a funds-based working capital facility?

To determine the amount the customer can draw on.

To ensure that bank funds are not tied up in obsolete stocks.

To ensure that drawings are being used to fund current assets.

To check that the value of eligible assets is at least equal to the approved credit limit.

Why must a company’s management plan for unexpected events even if they are unlikely to occur?

Many improbable unexpected events can have a significant effect on the business operations.

Adequate planning can help minimise the impact of disturbances relating to economic cycles and technological changes.

Robust planning can reduce costs as an alternative to obtaining insurance coverage.

Contingency planning is a prerequisite to obtain insurance coverage and business loans.

Under what circumstances might weak succession planning affect a borrower’s credit risk when a key management member leaves unexpectedly?

The nominated successor has not completed all required training.

The nominated successor lacks management integrity.

The nominated successor cannot take up the position for a few weeks.

Details of the nominated successor were not provided to the borrower’s bank.

What is the impact of low market entry barriers on competition within an industry and the financial performance of businesses’ operating within the industry?

Increased competition, decreased cash flow.

Increased competition, increased cash flow.

Decreased competition, decreased cash flow.

Decreased competition, increased cash flow.

What is the basic function of credit monitoring?

To ensure the borrower continues to be a good credit risk.

To ensure the borrower is operating within the credit limits.

To determine if the credit facilities are being used for the intended purpose

To determine what actions should be taken where there is a cause for concern.

At what point during an asset purchase do a company’s capital expenditures most affect its operational cash flow?

At the time of purchase and beyond due to financing costs.

Before the purchase while saving for the down payment.

When the asset purchased generates expenses such as taxes and insurance.

Capital expenditures do not affect cash flow as they are outside normal operational activities.

Financial Quiz

Authored by Anand Upadhyay

Other

12th Grade

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OPEN ENDED QUESTION

3 mins • 1 pt

In an initial review of a company’s financial statements, which ratios can be reviewed to uncover opportunities and identify potential risk flags? 1. Net income. 2. Gross margin. 3. Inventory days. 4. Return on equity.

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OPEN ENDED QUESTION

a)Current assets are less than net working capital.

b)Current assets are able to cover double the current liabilities.

c)Very few current assets have been funded from current liabilities.

d)A portion of current assets has been funded from long-term sources.

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Financial Quiz

In an initial review of a company’s financial statements, which ratios can be reviewed to uncover opportunities and identify potential risk flags? 1. Net income. 2. Gross margin. 3. Inventory days. 4. Return on equity.

How does industry risk affect the credit risk of a particular business enterprise that operates within that industry?

Companies operating in which industry are most likely to have a high investment in fixed infrastructure assets, with little inventory?

What is the difference between operating cash flow and earnings before interest, taxes, depreciation and amortisation (EBITDA)?

What is the first step for a management team in order to achieve results through the efforts of others?

Which costs related to environmental hazards can have a significant negative impact on a company’s credit risk?

What does a current ratio of 1.33 indicate about a company’s current assets?

What information in a credit agency report can help a bank assess a company’s management integrity?

Which is likely to be false of a company with a low gearing ratio?

Which industry factor increases the need for a company to compete for a high volume of sales to remain profitable?

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