WorksheetsPre Exam CICC Day 6
Total questions: 20
Worksheet time: 30mins
Which of these requirements is a restrictive covenant?
Financial statements shall be submitted every month.
A clause specifying a ceiling on debt to EBIDTA ratio.
A clause stipulating non-disposal of assets.
What is a negative pledge?
Charging the same asset to more than one lender.
Charging the asset to a lender with the right to cancel the charge at any time.
An undertaking not to charge a certain asset to any other lender.
What does the value of plant and machinery, as collateral, mostly depend on?
Their age and location.
Their age, maintenance, and how specific they are to a particular process.
Maintenance and availability of substitutes.
A competitive style of managing conflict is effective in which?
When a decision must be made in an emergency.
When you must consider opposing concerns that are equally important.
When you are dealing with opposing concerns that are equally important.
What is the basic function of a guarantee?
A guarantee secures the lender’s loan exposure by providing the additional security of the guarantor’s assets.
A guarantee provides support and a potential source of additional funds should the borrower default on their obligations, not meet credit covenants, or go into bankruptcy.
A guarantee acts as a pressure point on the borrower not to default on their obligations and not to violate credit covenants.
Why do lenders set financial covenants?
Financial covenants specify a performance level that a borrower should aspire to but is not held to.
Financial covenants specify a minimum performance level that a borrower must attain or maintain.
Financial covenants indicate a maximum performance level that a borrower must maintain at all times
What are some of the likely negative outcomes of adopting an avoidance approach when managing conflicts?
Delay, resentment, team fragmentation, and poor decisions.
Stress in the relationship, lack of time to find the best solution, and possible escalation and deadlock.
A superficial understanding of the situation and less-than-innovative solutions.
What is the purpose of an event-based covenant?
To set a financial course for the client to follow during the lifetime of the credit exposure.
To give the lender control upon the occurrence of a specified event.
To give the lender the capability to stop occurrence of a specified event.
Which statement about a guarantee is accurate?
A guarantee provides security to the beneficiary.
A guarantee provides both security and access to another set of cash flows to an unsecured creditor.
A guarantee gives access only to another set of cash flows to an unsecured creditor.
What are some of the likely negative outcomes of adopting an avoidance approach when managing conflicts?
Stress in the relationship, lack of time to find the best solution, and possible escalation and deadlock.
A superficial understanding of the situation and less-than-innovative solutions.
Delay, resentment, team fragmentation, and poor decisions.
Which of the following is a covenant?
Provide joint and several guarantee.
Provide mortgage of factory land and building.
Leverage should not exceed 2.5.
What is the most important consideration for lenders when taking shares as collateral?
Share values must have been consistent over the last three years.
The PE ratio of the company should not be higher than the market norm.
The shares must be easily saleable.
Which of these requirements is a financial covenant?
Debt to EBIDTA ratio shall not exceed 3.5 during the currency of the loan.
Select financial data shall be submitted every month.
The borrower shall request permission from the lender before they can change ownership.
To be valuable to the lender, what characteristics should security have?
Identifiable, non-perishable, accessible, and saleable.
Identifiable, accessible, saleable, and potential for appreciation.
Identifiable, accessible, and saleable only.
What are the appropriate ways to monitor debtors charged to your bank?
Visit the debtors every month and obtain their written acknowledgement.
Compare debtors’ levels with inventory levels and sales and look for any unusual patterns.
Obtain periodic accounts receivable aging reports and identify possibly doubtful items.
How is a provision for bad debts accounted for?
Debit: Operating Expenses; Credit: Trade Debtors
Debit: Bad Expenses Credit: Doubtful Accounts
Debit: Doubtful Accounts; Credit: Bad Expenses
When taking collateral, houses and buildings must be registered under a chattel mortgage, while cars and trucks must be registered under a regular mortgage.
False.
True.
What is one of the high-level decisions that can be taken when dealing with a covenant breach?
Waive the covenants of the loan to minimize the financial stressed on the borrower and force the business to restructure.
Waive the covenant breach and continue operating the business relationship as normal.
Waive the covenant and impose conditions until the business is back in compliance.
When do banks typically require a guarantee?
When it is considered necessary to prevent a company or individual from transferring their assets.
When the borrower is perceived to be not strong enough on its own to warrant the credit facility.
When the bank is dealing with an individual or family-owned company.
Why is frequent waiver of covenant not encouraged?
If the bank repeatedly waives a covenant breach every time it happens, it creates a pattern of behaviour that could compel a judge to overturn the covenant in a court action.
It creates more administrative work for the bank as it requires more frequent monitoring and reporting to higher management.
Frequent waiver of a covenant on its breach may lead to allegations of favouring certain clients and damaging the bank’s reputation.
