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WorksheetsMoody's Analytics Test -3
Total questions: 45
Worksheet time: 23mins
Which costs related to environmental hazards can have a significant negative impact on a
company’s credit risk?
Cost of insurance premiums.
Cost of hazardous waste clean-up
Cost of compliance with environmental laws
Cost of professional assessment of facilities for safety
What general inference can be made about a company that has positive cash flow from operations,
and that is borrowing and investing?
It is starting up
It is closing down
It is restructuring
It is acquiring other companies
If net sales for a company over three Fiscal Year Ends (FYE) was
FYE 1: INR 1,25,00,885,
FYE 2: INR 1,37,45,473 and
FYE 3: INR 1,40,25,992,
what is this company’s sales growth for FYE 3 compared to FYE 2?
2.0%
2.04%
8.87%
10.0%
Which action by a borrower’s management could have an adverse effect on its cash flow and ability
to meet its obligations?
Adopting a conservative financing strategy
Executing plans to ensure short-term goals are met
Increasing the rate of depreciation resulting in reduced net income
Disclosing information to other stakeholders on need to know basis
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, increased cash flow
Increased competition, decreased cash flow
Decreased competition, decreased cash flow
Decreased competition, increased cash flow
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.
1 and 2
1 and 4
2 and 3
3 and 4
Which organisational structure can inhibit management’s ability to take decisions thus adversely
affecting the company’s performance and credit risk?
A pyramidal structure
A centralised decision-making process
A structure that has distinct divisions between different functions
A structure in which roles and responsibilities are clearly documented
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 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
The assessment should continue with more focus on the sales projections scenarios and cash flow impact
Why does a special purpose vehicle expose a lender to more risk than conventional financing?
The loan has no security guaranteed
The sponsor has no established track record
The sponsor is the only party liable for the loan
The loan is repaid only from the project’s cash flows
A company has INR 11,304,950 in Cost of Goods Sold (COGS) and INR 1,091,070 in trade payables as
of its most recent fiscal year-end. The company claimed no depreciation in COGS. How many days on average did
it take this company to pay its trade creditors during the fiscal year?
9
10
35
38
Which activity can reduce a company’s cash flow position?
Sale of assets
Collection of receivables
Purchase of investments
Increase in owner’s equity
What type of early warning signals may be indicated as a result of technology changes?
Business
Fundamental
Market
Operational
which element in the development of a business plan would indicate a high degree of management
risk?
Set business objectives are easy to meet
Reports on progress implementation are often late
No consultation with stakeholders in setting up the plan
Finalisation of the business plan only a few days before the start date
Titan Ltd. is a lumber exporter with annual sales of INR 750,000, 45 inventory days, 35 trade
receivables days, and 40 trade payables days. What approximate amount of external financing will Titan Ltd. need
to support its operating cycle?
INR 61,644
INR 82,192
INR 102,740
INR 246,575
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
Why must a company’s management plan for unexpected events even if they are unlikely to occur?
Robust planning can reduce costs as an alternative to obtaining insurance coverage
Contingency planning is a prerequisite to obtain insurance coverage and business loans
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.
Under what circumstances might weak succession planning affect a borrower’s credit risk when a
key management member leaves unexpectedly?
The nominated successor lacks management integrity
The nominated successor has not completed all required training
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
Which is the best description of the gearing ratio?
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
An indication of how a business’s assets are funded between owners and creditors
At what point during an asset purchase do a company’s capital expenditures most affect its
operational cash flow?
Before the purchase while saving for the down payment
At the time of purchase and beyond due to financing costs
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
Which risk driver is most sensitive to economic factors such as a recession?
Capital expenditures
Sales growth figures
Trade receivable days
Operating profit margin
In what type of security charge are goods and raw materials commonly pledged as assets?
Assignment
Hypothecation
Lien
Mortgage
What is considered as one of the three levels of oversight in the corporate governance process?
The media
The regulators
The board of directors
Banks and other lenders
Which type of charge is appropriate when the security is a factory?
Hypothecation
Lien
Mortgage
Pledge
How does industry risk affect the credit risk of a particular business enterprise that operates within
that industry?
The effect is limited to industry-specific regulations.
The effect is substantial only if the industry is in a decline phase.
The effect is insignificant as long as the particular business performs well and generates enough cash.
The effect is significant as industry risk includes factors that determine capital requirements and cash
flow
Which party issues a letter of credit in a goods and services transaction?
Applicant
Bank
Beneficiary
Seller
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
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
What causes market overcapacity?
Industry growth
Weak competition
Drop in a sales price
Low product demand
What projected information is best to use to assess working capital limits?
Sales
Balance sheet.
Labour expenses
Profit and loss statement
What is the first step in the process of restructuring a loan?
Take control
Develop an action plan
Resolve future financing
Implement the action plan
In which scenario would customer concentration cause significant cash flow risk for a business?
The business sells clothing to individual consumers
The business distributes flour to most bakeries in the region
The business supplies specialised parts to the largest auto maker
The business provides cleaning services to schools, offices and residential buildings
What year-over-year change in gross margin represents positive financial risk?
No change represents stability
Gross margin does not affect risk.
A decrease represents profit growth
An increase represents profit growth
Which is a major risk for a business in the mature stage of its life cycle?
Failure to repay debt
Filing for bankruptcy.
Merger with a competitor
Inability to invest in new products
Which company related issue can result in a problem loan?
Deregulation
Globalisation
Illiquidity
Seasonality
Which figure is likely to increase for a business after a seasonal peak sales period?
Sales
Inventory
Trade payables
Trade receivables
What is a generally acceptable gearing ratio for a business in India?
1.00
2.00
3.00
4.00
Which is a long-term source of working capital financing?
Accrued expenses.
Customer advances
Term loans
Trade payables
What does the trade receivables days ratio measure?
Actual time it takes to pay suppliers
Average time it takes to pay suppliers.
Actual time it takes to collect cash from customers.
Average time it takes to collect cash from customers.
What projected information is best to use to assess working capital limits?
Sales.
Balance sheet
Labour expenses
Profit and loss statement
On what basis is the risk premium for a loan calculated?
Expected loss.
Loss given default
Exposure at default
Probability of default
Which industry factor increases the need for a company to compete for a high volume of sales to
remain profitable?
High fixed costs
Few competitors
High switching costs
Rapid demand growth
Which source of external information can help a relationship manager identify changes that might
affect the outlook for a borrower’s industry?
Credit bureau reports
Stock market announcements
Reports of parties that have defaulted
Government announcements of new or amended regulations
What is a sign of incipient stress which may result in an account being classified as Special
Mention Account (SMA) under the SMA-0 sub-category?
Delay of 30 days in submission of stock statements.
Decrease in frequency of overdrafts in current accounts.
Actual sales and operating profits falling short of projections accepted for loan sanction by 20%.
Return of three cheques issued by borrowers in 30 days on grounds of non-availability of
balance.
Which is an appropriate source of capital investment financing?
Line of credit
Letter of credit
Government grant
Working capital loan
What is the best time to pay a creditor to optimise cash flow?
Immediately
On the due date.
30-60 days after the due date
60-90 days after the due date.
