This Document Contains Chapters 16 to 17 Chapter 16 Lending Policies and Procedures: Managing Credit Risk Fill in the Blank Questions 1. The _________ is a uniform rating system developed by regulators where banks are given a rating from one to five in each of six categories and an overall rating from one to five. Answer: CAMELS 2. One of the 6 C’s of lending, _________ suggests that the lender must look at the position of the business firm in the industry and the outlook of the industry to evaluate a loan. Answer: condition 3. One of the 6 C’s of lending, _________ suggests that the lender must look to see if the borrower is legally entitled to sign a binding loan agreement. For an individual this entails making sure the borrower is of legal age to sign a contract. Answer: capacity 4. When a bank purchases a whole loan or a piece of a loan from another bank they are purchasing what is known as a _________. Answer: participation 5. Loans that have minor weaknesses because the bank has not followed its written loan policy or which have missing documentation are called _________ by regulators. Answer: criticized 6. _________ are loans extended to farmers and ranchers to assist in planting crops, harvesting crops and to support the feeding and care of livestock. Answer: Agriculture loans 7. _________ devote the bulk of their credit portfolio to large-denomination loans to corporations and other businesses and tend to be large banks. Answer: Wholesale lenders 8. _________ are loans which are secured by land buildings and other structures. These loans can be short term construction loans or longer term loans to finance the purchase of homes and apartments among others. Answer: Real estate loans 9. A _________ is signed by the borrower and indicates the principal amount of the loan, the interest rate on the loan and the terms under which repayment must take place. Answer: Promissory note 10. _________ are those things a borrower must do. They are actions the borrower must take. Examples include filing periodic financial statements with the bank and purchasing insurance on any collateral pledged. Answer: Affirmative covenants 11. _________ are when lenders extend credit to banks, insurance companies, and finance companies among others. Answer: Financial institution loans 12. _________ are loans that carry a strong probability of loss to the bank. Answer: Doubtful loans 13. A(n) _________ is the process of resolving a troubled loan so the bank can recover its funds. Answer: loan workout 14. _________ is one of the key features of any loan. This C of lending examines whether the borrower will have enough sales or income to repay the loan. Answer: cash 15. A bank’s _________ gives loan officers specific guidelines in making individual loan decisions and in shaping the overall loan portfolio. Answer: written loan policy 16. An approach in which the lending officer focuses on changes in borrower cash flows over time is known as the _____________ cash flow method. Answer: direct 17. _________ are loans granted to businesses to cover purchases of inventory, paying taxes and meeting payrolls. Answer: Commercial and industrial loans (C&I Loans) 18. _________ include credit to finance the purchase of automobiles, mobile homes, appliances and other retail goods and many other purchases by consumers. Answer: Loans to individuals (consumer loans) 19. _________ is where the lender buys equipment or vehicles and rents them to its customers. Answer: Lease financing receivables 20. Smaller banks tend to emphasize _________ in the form of smaller denomination personal cash loans and home mortgage loans to extended to individuals and families as well as smaller business loans. Answer: retail credit 21. The loan mix of any lending institution depends heavily on the _________ that each loan offers compared to all other assets the lending institution can acquire. Answer: expected yield 22. Under the _________ no individual can be denied credit because of race, sex, religious affiliation, age or receipt of public assistance. Answer: Equal Credit Opportunity Act (1974) 23. One aspect of the CAMELS rating system is _________ which looks at the quality of the bank’s loans. Examiners look at all loans over a certain size and a random selection of all other loans when looking at this aspect of a bank. Answer: asset quality 24. One part of the 6 C’s of lending is _________ which looks at whether the borrower has a well-defined purpose for the loan and a serious intent to repay the loan. Answer: character 25. One of the most widely consulted sources of data on business firms is _________ which was founded in Philadelphia in 1914 to exchange credit information among business lending institutions and to organize conferences and publish educational materials to train loan officers and credit analysts. Answer: Risk Management Associates (RMA) 26. One problem with the newer lending model called _________ was found to at least partially contribute to the recent crisis in the mortgage market. Answer: “Streamlining” 27. In the mortgage environment of the early 2000s, lenders were encouraged to sell individual loans and packages of loans to buy more liquid securities instead, thus shifting much of the risk of lending to capital markets. This process is referred to as ___________. Answer: Securitization 28. Factors such as changes in the economy, natural disasters, and regulation are referred to as __________ factors, while management errors, illegal manipulation, and ineffective lending policies are considered ___________ factors. Answer: External; internal 29. In the loan workout process, the preferred option is nearly always to seek a ___________, which gives both the lending institution and its customer the chance to restore normal operations. Answer: Revised loan agreement True/False Questions 30. The principal reason banks are chartered by federal and state governments is to make loans to their customers. Answer: True 31. Risk in banking tends to be concentrated in a bank’s loan portfolio. Answer: True 32. The largest banks have, on average, reduced their dependence on real estate loans relative to smaller banks. Answer: True 33. Real estate lending is popular with bank, in part, due to the growth of the secondary mortgage market. Answer: True 34. Banks in the United States are, on average, examined at least once every three years. Answer: True 35. Smaller banks tend to emphasize wholesale banking services. Answer: False 36. Retail credit in banking refers to such loans as residential mortgages and installment loans to individuals. Answer: True 37. Loans made by a particular bank secured by the bank’s own stock are not usually permitted except under special circumstances. Answer: True 38. Federally-supervised banks in the U.S. must make an “affirmative effort” to provide loans and other services to all credit-worthy borrowers in their chosen service area. Answer: True 39. Loans to minors are not legally enforceable contracts in most states. Answer: True 40. The letter “C” in the CAMELS rating system for banks in the U.S. refers to the “condition” of a bank. Answer: False 41. The letter “M” in the CAMELS rating system for banks in the U.S. refers to the “management quality” of a bank. Answer: True 42. The process of loan review means that a loan committee must generally approve a loan before the borrower is told the loan is approved. Answer: False 43. Troubled loans normally are subject to more frequent review than are sound loans. Answer: True 44. Credit card loans are generally more profitable for small and medium-size banks than for the largest banks. Answer: False 45. Banks should concentrate their lending on those loans in which they have the greatest cost advantage. Answer: True 46. The type of bank loan experiencing the largest losses per dollar of loan is credit card loans. Answer: True 47. Construction loans by a bank fit under the loan category known as commercial and industrial loans. Answer: False 48. If the economy slows down a bank should review its outstanding loans more frequently. Answer: True 49. Foreclosure on property pledged behind a bank loan does not subject a bank to liability to clean up any environmental damage the borrower may have caused to happen. Answer: False 50. Loans granted to businesses appear to convey positive information to the market place about a borrower’s credit quality, enabling a borrower to obtain more and cheaper funds from other sources. Answer: True 51. Loans to a bank’s officers can never exceed 2.5 percent of a bank’s capital and unimpaired surplus or $25,000 whichever is larger and cannot be more than $100,000. Answer: True 52. Financial institutions that disagree with examiner classifications of their loans can appeal these examiner ratings. Answer: True 53. A rating of “5” is the highest and best rating that a U.S. bank can receive under the CAMEL rating system. Answer: False 54. Accounts receivable financing means that a bank actually takes over ownership of receivables, whereas factoring means that a bank merely lends money on a borrowing customer’s receivables and the customer still has ownership of the receivables. Answer: False 55. A restriction against a borrower taking on new debt is an affirmative covenant in a loan contract. Answer: False 56. Loan review is considered to be a luxury, not a necessity for most banks, especially those with sound lending policies. Answer: False 57. Cash is one of the 6 C’s of lending and refers to the fact that the lender wants to make sure the borrower has the ability to generate enough cash to repay the loan. Answer: True 58. There are three principal sources of cash to repay a loan. These are cash flows generated from sales or income, funds generated from the liquidation of assets and funds raised by selling debt or equity securities. Answer: True 59. Negative covenants require the borrower to take certain actions. Answer: False 60. Affirmative covenants restrict a borrower from doing certain things. Answer: False 61. For ease and convenience most banks have the loan review conducted by the same person who makes the loan. This is particularly true of large banks. Answer: False 62. A loan workout is when the bank and the customer initially negotiate the terms of the loan. Answer: False 63. A written loan policy gives loan officers and the bank’s management specific guidelines in making individual loan decisions and in forming the bank’s loan portfolio. Answer: True 64. Commercial and industrial loans are loans to businesses to cover such things as purchasing inventory, paying taxes and meeting payroll expenses. Answer: True 65. Agriculture loans are loans that are made to individuals to finance vacations, purchase durable goods and other retail goods. Answer: False 66. The A in the CAMELS rating system stands for asset quality. Answer: True 67. Net cash flow from operations is the borrower’s net income expressed in cash rather than on an accrual basis. Answer: True 68. The “direct cash flow” method and “cash flow by origin” are two very different ways of assessing the cash flows of a potential borrower. Answer: False 69. Commercial banks are the largest originator of household loans. Answer: True 70. Following the recent global credit crisis, regulators have begun to emphasize the need for loan originators to know their borrowers better and retain some of the risk on loans that they sell. Answer: True Multiple Choice Questions 71. The principal economic function of banks is to: A) Take deposits B) Make loans C) Sell financial services D) Encourage spending E) None of the above Answer: B 72. Loans extended to finance the purchase of automobiles, mobile homes, home appliances, and vacations are classified as: A) Real estate loans B) Financial institutions C) Agricultural loans D) Commercial and industrial loans E) None of the above Answer: E 73. According to the textbook the largest category (by dollar volume) of loans extended by U.S. banks is: A) Real estate loans B) Financial institutions C) Agricultural loans D) Commercial and industrial loans E) None of the above Answer: A 74. Banks that emphasize lending to commercial customers are labeled: A) Wholesale banks B) Retail banks C) Personal banks D) Nonbank banks E) Regional banks Answer: A 75. The vast majority of FDIC-insured institutions are classified as: A) Credit card banks B) Agricultural banks C) Consumer lenders D) Commercial lenders E) Mortgage lenders Answer: D 76. In the United States national banks cannot extend an unsecured loan to a single borrower that exceeds _________ of a national bank’s capital and surplus. The correct figure that fills in the blank in the preceding sentence is: A) 25 percent B) 10 percent C) 15 percent D) 20 percent E) None of the above Answer: C 77. Real estate loans made by national banks in the U.S. cannot exceed: A) 15 percent of a national bank’s total assets or 25 percent of its total capital. B) A national bank’s total capital and surplus or 70 percent of time and savings deposits, whichever is greater. C) 20 percent of a national bank’s capital and surplus or 80 percent of its savings deposits, whichever is smaller in amount. D) 25 percent of capital or 10 percent of the core deposits of a national bank, whichever gives the largest amount. E) None of the above. Answer: B 78. Loans to finance one-to-four family homes fall under which loan category? A) Commercial and industrial loans B) Real estate loans C) Loans to individuals D) Single-payment loans E) None of the above. Answer: B 79. The loan category experiencing the largest losses (loan defaults) is usually: A) Credit card loans B) Real estate loans C) Agricultural loans D) Commercial and industrial loans E) None of the above Answer: A 80. The most costly type of loan to make (measured by the cost per dollar of loan) for a bank is usually: A) Real estate loans B) Agricultural loans C) Commercial and industrial loans D) Loans to financial institutions E) None of the above. Answer: E 81. Loans providing credit to finance the purchase of automobiles, mobile homes, appliances, and other retail goods to repair and modernize homes are classified under the category: A) Financial institution loans B) Commercial industrial C) Loans to individuals D) Miscellaneous loans E) None of the above Answer: C 82. Loans extended to farm and ranch operations to assist in planting and harvesting crops and to support the feeding and care of livestock are known as: A) Real estate loans B) Commercial and industrial loans C) Land loans D) Agricultural loans E) None of the above. Answer: D 83. Loans granted to businesses to cover such expenses as purchasing inventories, paying taxes, and meeting payrolls are known as: A) Commercial and industrial loans B) Agricultural loans C) Real estate loans D) Loans to individuals E) None of the above. Answer: A 84. A lender that makes a loan to a minor would be violating which of the 6 C’s of lending? A) Character B) Capacity C) Cash D) Control E) Collateral Answer: B 85. A lender that makes a loan that violates its written loan policy would be violating which of the 6 C’s of lending? A) Character B) Capacity C) Cash D) Control E) Collateral Answer: D 86. Which of the following is a factor in determining the mix of loans that a bank has? A) The location of the bank B) The size of the bank C) The written loan policy of the bank D) The experience and expertise of the management E) All of the above are factors in determining the mix of loans Answer: E 87. A loan to a local business to purchase a new machine would be categorized as: A) A consumer loan B) An agriculture loan C) A commercial and industrial loan D) A real estate loan E) None of the above Answer: C 88. The lender's secondary source of repayment in case of default is: A) Capacity. B) Collateral. C) Character. D) Capital. E) Credit. Answer: B 89. A lender that makes a loan to an individual whose only income is commission based and who hasn’t made a sale in six weeks may be violating which of the 6 C’s of lending? A) Character B) Capacity C) Cash D) Control E) Collateral Answer: C 90. Sean Carter has an excellent credit rating. Which of the 6 C’s of lending would this piece of information belong to? A) Character B) Capacity C) Cash D) Collateral E) Conditions Answer: A 91. First National Bank of Edmond asks a prospective customer for her driver’s license. Which of the 6 C’s of lending would this piece of information belong to? A) Character B) Capacity C) Cash D) Collateral E) Conditions Answer: B 92. The loan officer of Second National Bank of Laramie decides to review the insurance coverage of one of its business customers. Which of the 6 C’s of lending would this piece of information belong to? A) Character B) Capacity C) Cash D) Collateral E) Conditions Answer: D 93. The TRC Company is required by its bank to pay no dividend over $3 per share. What is this? A) An affirmative covenant B) A negative covenant C) A Special covenant D) A horizontal covenant E) None of the above Answer: B 94. A bank that primarily makes its loans to individuals, families and small businesses is: A) A retail bank B) A wholesale lender C) A money center bank D) A money market bank E) None of the above Answer: A 95. The process of resolving a troubled loan so the lender can recover its funds is called the: A) Loan Review B) Written Loan Policy C) Loan Workout D) Loan Commitment Agreement E) None of the above Answer: C 96. Which of the following is a sign of a potential loan problem? A) Timely receipt of financial statements from the company with a loan B) Increases in the stock price of the company that has a loan C) Increases in earnings for each of the last three years of a company D) Changes in the methods used to account for inventory, depreciation and other items E) All of the above are signs of problems with the loan Answer: D 97. Which of the following should be part of the written loan policy? A) Lending authority of each loan officer and loan committee B) Lines of responsibility for finding and reporting information within the loan department C) A statement of quality standards for all loans D) A statement for the preferred upper limit for total loans outstanding E) All of the above should be part of the written loan policy Answer: E 98. A lender reviews the partnership agreement of one of its small business customers. Which of the 6 C’s of lending would this piece of information belong to? A) Character B) Capacity C) Cash D) Collateral E) Conditions Answer: B 99. Which act requires that bank loans to insiders be priced at market? A) Community Reinvestment Act of 1977 B) Equal Credit Opportunity Act of 1974 C) Sarbanes-Oxley Act of 2002 D) Bank Lending Act of 2003 E) U.S. Patriot Act Answer: C 100. A method whereby the loan officer focuses on how the borrower cash flows may change over time is known as: A) Indirect cash flow B) Direct cash flow C) Pervasive cash flow D) Variable cash flow E) Total cash flow Answer: B 101. The South Carolina National Bank makes a loan to the Heritage Credit Union. What type of loan did this bank make? A) Financial institution loan B) Commercial and industrial loan C) Loans to individuals D) Miscellaneous loans E) Lease financing receivables Answer: A 102. A loan for Colin Beverly to purchase a new Mazda Miata would fit into which of the following categories of bank loans? A) Financial institution loan B) Commercial and industrial loan C) Loan to an Individual D) Miscellaneous loan E) Lease financing receivables Answer: C 103. The Price Bank of Edmond makes a loan to Home Depot. What type of loan has this bank made? A) Financial institution loan B) Commercial and industrial loan C) Loan to an individual D) Miscellaneous loan E) Lease financing receivables Answer: B 104. The First State Bank of Duncan buys railroad cars and rents them to the Santa Fe Railroad Company. What type of loan has this bank made? A) Financial institution loan B) Commercial and industrial loan C) Loan to an individual D) Miscellaneous loan E) Lease financing receivables Answer: E 105. The Third National Bank of Wichita makes a loan so that Tim Bridges can buy 1000 shares of Coca Cola stock. Which category of loans would this loan fit in best? A) Financial institution loan B) Commercial and industrial loan C) Loan to an individual D) Miscellaneous loan E) Lease financing receivables Answer: D 106. The First State Bank is located in Guyman, Oklahoma which is in the middle of the wheat country of Oklahoma and as a result many of its loans are agriculture loans. What factor determining the growth and mixture of loans does this fact reflect? A) Characteristics of the market area B) Lender size C) The experience and expertise of management D) The written loan policy of the bank E) Bank regulations Answer: A 107. The Second State Bank has less than $100 million in assets and as a result primarily makes real estate loans, other consumer loans and loans to very small businesses. What factor determining the growth and mixture of loans does this fact reflect? A) Characteristics of the market area B) Lender size C) The experience and expertise of management D) The written loan policy of the bank E) Bank regulations Answer: B 108. Geoff Willis and Mary Williams the president and CEO of the First National Bank of Edmond both come from a background of retail banking. As a result they have decided to focus their lending activities on consumer loans and loans to small business. What factor determining the growth and mixture of loans does this fact reflect? A) Characteristics of the market area B) Lender size C) The experience and expertise of management D) The written loan policy of the bank E) Bank regulations Answer: C 109. First State Bank’s loan policy manual states ‘that the goal of the bank is to make high quality loans for home mortgages, the purchase of automobiles and small business accounts receivables’. What factor determining the growth and mixture of loans does this fact reflect? A) Characteristics of the market area B) Lender Size C) The experience and expertise of management D) The written loan policy of the bank E) Bank regulations Answer: D 110. The Second National Bank has capital and surplus of $100 million. The bank has decided that the most that it can loan to the Krumlova Manufacturing Company is $15 million. What factor determining the growth and mixture of loans does this most likely reflect for this bank? A) Characteristics of the market area B) Lender size C) The experience and expertise of management D) The written loan policy of the bank E) Bank regulations Answer: E 111. A loan that appears to examiners to contain significant weaknesses or that represent a dangerous concentration of credit in one borrower or industry are called: A) Criticized loans B) Scheduled loans C) Substandard loans D) Doubtful loans E) Loss loans Answer: B 112. A loan that examiners regard as uncollectible and unsuitable to be called a bank asset is called a: A) Criticized loan B) Scheduled loan C) Substandard loan D) Doubtful loan E) Loss loan Answer: E 113. The law that requires banks to make ‘an affirmative effort’ to meet the credit needs of individuals and businesses in their trade territories is called: A) The Sarbanes-Oxley Act B) The Community Reinvestment Act C) The Equal Credit Opportunity Act D) The Truth in Lending Act E) None of the above Answer: B 114. The law that prevents individuals from being denied credit because of race, sex, religious affiliation, age or receipt of public assistance is called: A) The Sarbanes-Oxley Act B) The Community Reinvestment Act C) The Equal Credit Opportunity Act D) The Truth in Lending Act E) None of the above Answer: C 115. Dan Cross is a junior loan officer with First State Bank of Durant. He has been busy visiting local businesses to see of any of them need credit. Which step in the lending process is Dan performing? A) Finding prospective customers B) Evaluating a customer’s character and sincerity C) Making a site visit and evaluating a customer’s credit history D) Evaluating a prospective customer’s financial condition E) Assessing possible collateral and signing the loan agreement Answer: A 116. Shelby Mann is a loan officer with the First National Bank. She interviews a potential loan customer to find out exactly why the person needs the loan and whether they would be serious about repaying the loan. Which step in the lending process is Shelby performing? A) Finding prospective customers B) Evaluating a customer’s character and sincerity C) Making a site visit and evaluating a customer’s credit history D) Evaluating a prospective customer’s financial condition E) Assessing possible collateral and signing the loan agreement Answer: B 117. Jessica Simpson, a loan officer with First National Bank, visits the Tate Manufacturing Company and talks to other lenders to see their experience with Tate Manufacturing. What step in the lending process is Jessica performing? A) Finding prospective customers B) Evaluating a customer’s character and sincerity C) Making a site visit and evaluating a customer’s credit history D) Evaluating a prospective customer’s financial condition E) Assessing possible collateral and signing the loan agreement Answer: C 118. Terry May, a loan officer with First National Bank, calculates liquidity and debt ratios for the Lava Lamp Company and also examines their cash flow statement. What step in the lending process is Terry performing? A) Finding prospective customers B) Evaluating a customer’s character and sincerity C) Making a site visit and evaluating a customer’s credit history D) Evaluating a prospective customer’s financial condition E) Assessing possible collateral and signing the loan agreement Answer: D 119. Jerry LeGere, a loan officer with First National Bank, checks to see if the house pledged to back up a home mortgage has a clear title and proper insurance. What step in the lending process is Jerry performing? A) Finding prospective customers B) Evaluating a customer’s character and sincerity C) Making a site visit and evaluating a customer’s credit history D) Evaluating a prospective customer’s financial condition E) Assessing possible collateral and signing the loan agreement Answer: E 120. The Tate Manufacturing Company has $150 million in sales revenue with $90 million in cost of goods sold. It has selling and administrative expenses of $10, pays annual taxes in the amount of $10 and has depreciation and other non-cash expenses of $30 million. What are this firm’s annual projected cash flows? A) $150 B) $60 C) $70 D) $40 E) None of the above Answer: C Chapter 17 Lending to Business Firms and Pricing Business Loans Fill in the Blank Questions 1. A(n) _________ is generally used to finance the purchase of inventory to sell and take advantage of the firm's normal cash cycle to repay the loan. Answer: self-liquidating inventory loan 2. A(n) _________ is generally used to support the construction of homes, apartments, office buildings and other permanent structures. Answer: interim construction loan 3. Working capital loans often require __________. These are required deposits in the bank by the borrower whose size is dependent on the size of the credit line. Answer: compensating deposit balances 4. When the title to accounts receivables pledged in an asset based loan is passed to the lender and the lender takes some of the responsibility for collecting the accounts receivables this is called _________. Answer: factoring 5. A(n) _________ is the purchase of a publicly traded company by a small group of investors. These investors often borrow very heavily to finance the purchase of the stock of the company. Answer: LBO 6. _________ are potential claims against the borrower which do not show up on the borrower's balance sheet. One new form of this is due to environmental damage by the borrower. Answer: Contingent liabilities 7. _________ are designed to fund long- and medium-term investments such as the purchase of equipment. Money is borrowed in one lump sum and repayments are generally made in installments. Answer: Term loans 8. A(n) _________ is a contractual promise by a bank to lend to a customer up to a maximum amount of money at a set interest rate (or rate mark up over prime or LIBOR). The only way the bank can renege on its promise is if there has been a "material adverse change" in the borrower's financial condition. Answer: formal loan commitment 9. _________ examines how effectively assets are being utilized to generate sales and how efficiently sales are converted into cash. Answer: Operating efficiency 10. A(n) _________ is a loan extended to a business firm by a group of lenders in order to reduce the risk exposure to any one lending institution. Answer: syndicated loan 11. _________ refers to the protection afforded creditors of a firm based on the amount of the firm's earnings. Answer: Coverage 12. The borrower's _________ reflects his or her ability to raise cash in a timely fashion at a reasonable cost. Answer: liquidity 13. _________ are the ultimate standard of performance in a market oriented economy. These measure the net income that remains for owners after all expenses have been charged against revenues. Answer: Profitability measures 14. _________ refers to the borrowers' use of debt in their firm. Answer: Leverage 15. Wages and salaries to net sales, overhead expenses to net sales and cost of goods sold to net sales are all measures of _________. Answer: a business customer's control over expenses 16. _________ is a way to price loans which starts with the costs of making a loan and adds to it a risk premium for default risk and a desired profit margin. Answer: Cost plus loan pricing 17. The _________ approach to pricing a loan starts with a base interest rate and adds a risk premium for default and for time to maturity. Answer: price leadership 18. The _________ is the interest rate charged the bank's most creditworthy customers on short-term working capital loans. Answer: prime rate 19. _________ is the rate on short-term Eurocurrency deposits which range in maturity from a few days to a few months. Answer: LIBOR 20. The _________ is a way to price loans which allows banks to compete with the commercial paper market. Answer: below prime rate pricing 21. The _________ is a way of pricing loans that allows a bank to take into account the entire relationship the bank has with the customer when pricing the loan. Answer: customer profitability analysis 22. _________ is the average deposit balance by the customer minus the average float adjusted for reserve requirements. Answer: Net investable funds 23. The _________ is the risk premium that has to do with the quality of the borrower. Answer: default risk premium 24. The _________ is the risk premium that has to do with the time to maturity on the borrowed funds. Answer: term-risk premium 25. _________ is the base of the cost-plus loan pricing model. Answer: Marginal cost of raising loanable funds 26. In the price leadership model, the amount above the price rate is often called the _____________. Answer: markup 27. A proposed loan is acceptable when the net rate of return from a customer profitability analysis is __________. Answer: positive 28. SNCs are also known as _____________ loans. Answer: syndicated 29. Weak loans considered to be substandard or doubtful in quality are also known as __________ credits. Answer: classified 30. An interest rate most widely used to price loans extended by banks operating in the U.S. is _________. Answer: LIBOR 31. The _________ is the rate considered to the most common base rate figure announced by the majority of the 25 largest banks that publish their prime rates regularly. Answer: prevailing prime rate 32. With the advent of inflation and more volatile interest rates gave rise to a(n) _________, tied to changes in important money market interest rates such as the 90 day commercial paper rate. Answer: floating prime rate 33. _________ loans represent the earliest form of lending that banks have carried out in their more than 2000 year history. Answer: Commercial and industrial 34. _________ provide businesses with short-term credit lasting from a few days to about one year. These loans come close to self-liquidating loans. Answer: Working capital loans 35. _________ support installment purchases of automobiles, home appliances, furniture, business equipment and other durable goods by financing the receivables that dealers take on when they write installment contracts to cover customer purchases. Answer: Retailer and equipment financing 36. One of the most aggressive competitors with banks today are _________. Examples include GMAC, Ford Motor Credit and GE Capital. Answer: captive finance companies 37. The apparent size bias in the financial marketplace led to the creation of the _________ in the 1950’s to guarantee loans made to small businesses by private lending institutions. Answer: Small Business Administration (SBA) 38. The most risky of all business loans are _________. This is credit to finance the construction of fixed assets designed to generate a flow or revenue in future periods. This can include financing a new oil refinery or power plant or other similar fixed assets. Answer: project loans 39. A firm’s balance sheet and income statement expressed as a percentage of total assets or total sales are often called _________. Answer: common size ratios 40. A third financial statement used in addition to the income statement and balance sheet by lenders is the _________. It is required by FASB and is usually readily available from borrowers. Answer: Statement of Cash Flows True/False Questions 41. Foreclosure on property pledged behind a bank loan does not subject a bank to liability to clean up any environmental damage the borrower may have caused to happen. Answer: False 42. In the United States about 25 percent of banks' total loans consist of commercial and industrial loans. Answer: True 43. Self-liquidating business loans are designed to take advantage of the normal cash cycle in a business firm. Answer: True 44. Short-term (under one year) loans to business firms account for over half of all bank loans to businesses in the United States. Answer: True 45. Working-capital loans are normally secured by a business firm's plant and equipment. Answer: False 46. Working-capital loans, unlike most other types of business loans, usually do not require the customer to keep a compensating deposit balance with the lending bank. Answer: True 47. Leveraged buyouts (LBOs) involve the purchase of businesses or of selected assets from business firms with at least 75 percent of the cost of the purchase funded by current earnings and sales of stock. Answer: False 48. A project loan secured by the credit of the company or companies sponsoring the project is called a project loan granted on a recourse basis. Answer: True 49. Term loans normally are secured by accounts receivable and inventory. Answer: False 50. Term loans look primarily to the flow of future earnings of the borrowing business firm to amortize and retire its loan. Answer: True 51. Under recent EPA guidelines if a lender forecloses on environmentally damaged property, the lender must post that property for sale within 12 months after securing marketable title. Answer: True 52. To avoid environmental liability under recent EPA guidelines a lender must accept any bona fide offer for property foreclosed upon if the offer would fully repay the remaining amounts owed. Answer: True 53. Under current federal laws a lender is required to make an environmental site assessment of the borrower's property in order to avoid environmental liability. Answer: False 54. Floor planning agreements typically include a loan-loss reserve, built up from interest earned as borrowers repay their installment loans. Answer: True 55. If a bank's agent visits a dealer using floor planning and finds any inventory items sold for which the bank providing financing has not received payment, the loan will be immediately foreclosed upon. Answer: False 56. When a bank examines a borrower's operating efficiency they are looking at the protection afforded creditors from the borrower's earnings. Answer: False 57. The firm's coverage ratios measure how carefully the firm's management monitor and control its expenses. Answer: False 58. Liquidity measure a business firm's ability to raise cash in a timely fashion at a reasonable cost. Answer: True 59. The ultimate standard of performance in a market-oriented economy is how much net income remains after all expenses have been charged against revenues. Answer: True 60. The business loan pricing method that relies upon banks knowing what their costs are is the price leadership model. Answer: False 61. The price leadership method of loan pricing includes a markup for default risk, but not for term risk. Answer: False 62. The sum of the default-risk premium plus the term risk premium on a business loan is one of the elements of the cost-plus loan pricing method. Answer: False 63. In order to control the risk exposure on their business loans most banks use both price and credit rationing to regulate the size and composition of their loan portfolios. Answer: True 64. In a period of rising interest rates the times-prime method causes the customer's loan rate to rise faster than the prime-plus method. Answer: True 65. If interest rates fall, a customer's loan rate will decline more rapidly under the times-prime method than under the prime-plus method of business loan pricing. Answer: True 66. Banks attempting to compete with the growing commercial paper market developed the cost-plus business loan pricing method. Answer: False 67. The loan-pricing method that takes the whole customer relationship into account when pricing each loan request is known as the cost-benefit loan pricing method. Answer: False 68. The loan-pricing technique known as CPA can be used to identify the most profitable types of bank customers and loans and also who are the most successful loan officers. Answer: True 69. The basic strength of the cost plus loan pricing method is that it considers the competition from other lenders. Answer: False 70. The basic weakness of the cost plus loan pricing method is that it does not consider the competition from other lenders when setting the loan price. Answer: True 71. The basic strength of the below prime market pricing model is that it allows the bank to compete with the commercial paper market. Answer: True 72. The basic weakness of the below prime market pricing model is that there are narrow margins or markups on loans. Answer: True 73. The majority of syndicated loans are held by banks. Answer: False 74. Syndicated loans are a type of working capital loan. Answer: False 75. According to the textbook, small business lending by banks is on the decline. Answer: True 76. The amount of business lending tends to rise during periods of expansion. Answer: True 77. The amount of business lending tends to fall during recessionary periods. Answer: True 78. Financial institutions generally use internal credit rating systems to evaluate credit quality. Answer: True Multiple Choice Questions 79. Short-term lending to support the construction of homes, apartments, office buildings, shopping centers, and other permanent structures is known as a (or an): A) Self-liquidating B) Working capital loan C) Interim construction loan D) Asset-based loan E) None of the above Answer: C 80. Business loans designed to fund long- and medium-term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period longer than one year are known as: A) Working capital loans B) Term loans C) Interim construction financing D) Durable goods loan E) None of the above Answer: B 81. A loan whose principal is not due to be paid back until the loan's term ends and in which only interest is paid periodically during the life of the loan is called a (or an): A) Working capital loan B) Project loan C) Bullet loan D) Interim construction loan E) None of the above Answer: C 82. A credit agreement in which a business customer may borrow up to a pre-specified limit, repay all or a portion of the borrowing, and reborrow as necessary until the credit line matures is known as a (an): A) Interim construction B) Project loan C) Working-capital loan D) Revolving line of credit E) None of the above Answer: D 83. When analyzing a commercial loan credit request, which of the following statements is (are) correct? A) The lender should evaluate the potential income available to service the loan. B) The lender should evaluate the potential cash flow available to service the loan. C) The lender should be certain that the loan is adequate to meet the needs of the borrower. D) A and B E) B and C Answer: E 84. Banks oftentimes bid on the opportunity to finance the entire inventory of an automobile dealer through a ___________ arrangement. A) Factoring B) Floor planning C) Project loan D) Revolving line of credit E) None of the above Answer: B 85. The most common sources that lenders look to for repayment of business loans include all of the following except: A) The borrower's cash flow B) Assets pledged as collateral C) Relatives of the borrowe. D) The borrowers net worth E) None of the above Answer: C 86. When analyzing the financial statements of a business, a credit analyst will look for ratios in which of the following categories: A) Profitability. B) Coverage C) Efficiency D) Liquidity E) All of the above are categories of ratios bankers will look for Answer: E 87. 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: A) Lender Protection Program B) Environmental Risk Assessment Program C) Lender Liability Security Program D) Environmental Pollution Control Program E) None of the above. Answer: B 88. Term loans normally are secured by: A) Fixed assets B) Accounts receivable C) Inventories D) Personal property E) None of the above. Answer: A 89. Under court interpretation of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 lenders may be liable for clean-up costs of hazardous substances if: A) The lender in involved in managing property with hazardous wastes B) The lender has a strong association with the property owner C) The lender has managed its customer's firms and there are toxic wastes involved D) All of the above E) None of the above Answer: D 90. A bank that wants to examine the operating efficiency of a borrower would most likely examine which of the following ratios? A) Cost of Goods Sold/ Average Inventory B) Income Before Interest and Taxes/ Interest Payments C) Cost of Goods Sold/ Net Sales D) Current Assets/ Current Liabilities E) All of the Above Answer: A 91. A bank that wants to examine the liquidity of a borrower would most likely examine which of the following ratios? A) Costs of Goods Sold/ Average inventory B) Income Before Interest and Taxes/ Interest Payments C) Cost of Goods Sold/ Net Sales D) Current Assets/ Current Liabilities E) All of the Above Answer: D 92. 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? A) Customer's Control over Expenses B) Customer's Liquidity C) Customer's Operating Efficiency D) Customer's Profitability E) None of the Above Answer: B 93. A government security dealer requires credit to add new government securities to his security portfolio. What type of loan is this? A) Self-liquidating inventory loan B) Working capital loan C) Security dealer financing D) Revolving line of credit E) None of the above Answer: C 94. 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? A) Self-liquidating inventory loan B) Working capital loan C) Security dealer financing D) Revolving line of credit E) None of the above Answer: B 95. 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? A) Self-liquidating inventory loan B) Working capital loan C) Security dealer financing D) Revolving line of credit E) None of the above Answer: A 96. 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? A) Self-liquidating inventory loan B) Working capital loan C) Security dealer financing D) Revolving line of credit E) None of the above Answer: D 97. 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: A) An LBO B) A revolving line of credit C) A working capital loan D) A syndicated loan E) None of the above Answer: D 98. A bank that is examining the ratio of total liabilities to total assets is examining which category of ratios? A) Expense Control Measures B) Operating Efficiency Measures C) Coverage Measures D) Liquidity Measures E) Leverage Measures Answer: E 99. A bank that is examining the ratio of costs of goods sold to inventory is examining which category of ratios? A) Expense Control Measures B) Operating Efficiency Measures C) Coverage Measures D) Liquidity Measures E) Leverage Measures Answer: B 100. A bank that is examining the ratio of overhead expenses to net sales is examining which category of ratios? A) Expense Control Measures B) Operating Efficiency Measures C) Coverage Measures D) Liquidity Measures E) Leverage Measures Answer: A 101. Which dimension of a business firm's financial and operating performance would unfunded pension liabilities fit best? A) Profitability measure B) Market indicator C) Contingent liability D) Marketability of the product or service E) None of the above Answer: C 102. Which dimension of a business firm's financial and operating performance would the percentage change in the firm's stock price fit best? A) Profitability measure B) Market indicator C) Contingent liability D) Marketability of the product or service E) None of the above Answer: B 103. Which dimension of a business firm's financial and operating performance would the gross profit margin fit best? A) Liquidity measure B) Market indicator C) Contingent liability D) Marketability of the product or service E) None of the above Answer: D 104. According to the cost-plus model for pricing loans, factors that should be considered in pricing a loan include: A) The marginal cost of raising loanable funds to support the loan request B) Nonfunds operating costs C) An appropriate margin to compensate the bank for default risk. D) The bank's desired profit margin E) All of the above Answer: E 105. The business loan pricing method that includes the nonfunds operating costs of making a loan plus the bank's desired profit margin is: A) The Cost-Plus Loan-Pricing Method B) The Price Leadership Model C) The Markup Model D) Customer Profitability Analysis E) None of the above Answer: A 106. The business loan pricing method that estimates the total revenues a loan will generate, the net amount of loanable funds the bank must turn over to the borrower, and the before-tax yield expected from the loan is the: A) The Cost-Plus Loan-Pricing Method B) The Price Leadership Model C) The Below Prime Rate Pricing Model D) Customer Profitability Analysis E) None of the above Answer: D 107. Suppose a business borrower is quoted a loan rate of two percentage points above the prevailing prime interest rate posted by leading U.S. banks. This is an example of the: A) Times-prime pricing method. B) Market-based pricing method. C) Cost-plus loan-pricing method. D) Prime-plus pricing method. E) Customer profitability analysis pricing method. Answer: D 108. The method of pricing a business loan that contends that a bank should take the whole customer relationship into account when pricing each loan request is the: A) Cost-Plus Loan-Pricing Method B) Price Leadership Model C) Below Prime Rate Pricing Model D) Customer Profitability Analysis E) None of the above. Answer: D 109. The business loan pricing method that bases a loan rate on a relatively low money market interest rate (such as the federal funds rate) plus a small margin to cover risk exposure, other operating costs, and a profit margin is known as the: A) Price Leadership Model B) Below Prime Rate Pricing Model C) Cost-Plus Loan Pricing Method D) Customer Profitability Analysis E) None of the above. Answer: B 110. Which of the following is a strength of the cost-plus loan pricing method? A) It considers the competition from other lenders B) It allows the bank to compete more aggressively with the commercial paper market C) It considers the cost of loanable funds and the operating costs of running the bank D) It takes the whole customer relationship into account E) None of the above Answer: C 111. Which of the following is a weakness of the price leadership loan pricing method? A) It does not consider the marginal cost of raising funds B) It does not give much regard for the competition from other lenders C) The bank must know what their costs are in order to make correctly price loans D) The bank must consider the revenues and expenses from all of the bank's dealings with the customer E) None of the above Answer: A 112. Which of the following is a strength of the markup (or below prime market) loan pricing method? A) It considers the competition from other lenders B) It allows the bank to compete more aggressively with the commercial paper market C) It considers the cost of loanable funds and the operating costs of running the bank D) It takes the whole customer relationship into account E) None of the above Answer: B 113. Which of the following is a weakness of the cost-plus loan pricing method? A) It does not consider the marginal cost of raising funds B) It does not give much regard for the competition from other lenders C) The bank must know what their costs are in order to make correctly price loans D) B and C above E) All of the above Answer: D 114. Which of the following is a strength of the price leadership loan pricing method? A) It considers the competition from other lenders B) It allows the bank to compete more aggressively with the commercial paper market C) It considers the cost of loanable funds and the operating costs of running the bank D) It takes the whole customer relationship into account E) None of the above Answer: A 115. Which of the following is a strength of the customer profitability analysis method for pricing loans? A) It considers the competition from other lenders B) It allows the bank to compete more aggressively with the commercial paper market C) It considers the cost of loanable funds and the operating costs of running the bank D) It takes the whole customer relationship into account E) None of the above Answer: D 116. The business loan pricing method which starts with a base rate such as the bank's prime rate and adds a markup for default and term risk is known as: A) The Cost-Plus Loan-Pricing Method B) The Price Leadership Model C) The Below Prime Rate Pricing Model D) Customer Profitability Analysis E) None of the above Answer: B 117. A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds costs to the bank are .5 percent. It has also determined that its margin to compensate the bank for default risk for a particular customer is .30 percent. It has also determined that it wants to have a profit margin of .3 percent. If this customer wants to borrow $10,000,000, how much in total interest costs will this customer pay in one year? A) $450,000 B) $480,000 C) $510,000 D) $560,000 E) None of the above Answer: D 118. A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds costs to the bank are .5 percent. It has also determined that its margin to compensate the bank for default risk for a particular customer is .30 percent. It has also determined that it wants to have a profit margin of .3 percent. What business loan model is this bank using to price the loan for this customer? A) The Cost-Plus Loan-Pricing Method B) The Price Leadership Model C) The Below Prime Rate Pricing Model D) Customer Profitability Analysis E) None of the above Answer: A 119. A bank has a prime rate of 6 percent for its best customers. It has determined that the default risk premium for a particular customer is .4% and the term-risk premium for this loan is .25 percent. If this customer wants to borrow $5.0 million from the bank, how much in interest will this customer pay in one year? A) $332,500 B) $665,000 C) $300,000 D) $320,000 E) None of the above Answer: A 120. The bank has determined the information below for one of its customers. This customer wants to borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000. What is the expected net rate of return on this loan?
Expected Revenues Expected Costs
Interest Revenues $1,000,000 Deposit Interest $30,000
Commitment Fee $15,000 Cost of Other Funds Raised $890,000
Deposit Service Fees $5,000 Loan Processing Costs $8000
Agency Fees $6000 Activity and Record Keeping Costs $16,000
A) 10.00 percent B) 8.20 percent C) 10.25 percent D) 13.75 percent E) None of the above Answer: C 121. The bank has determined the information below for one of its customers. This customer wants to borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000. What is the interest rate the bank is charging the customer on the funds they have borrowed?
Expected Revenues Expected Costs
Interest Revenues $1,000,000 Deposit Interest $30,000
Commitment Fee $15,000 Cost of Other Funds Raised $890,000
Deposit Service Fees $5,000 Loan Processing Costs $8000
Agency Fees $6000 Activity and Record Keeping Costs $16,000
A) 10.00 percent B) 12.50 percent C) 10.25 percent D) 13.75 percent E) None of the above Answer: A 122. SNCs are also known as: A) Working capital loans B) Asset-backed loans C) Syndicated loans D) Construction loans E) Inventory loans Answer: C 123. Small business lending by banks is A) Declining B) Rising C) Relatively constant D) One with no pattern E) One with an unknown pattern Answer: A 124. The most common type of loan foreign banks make in the U.S. are: A) Commercial loans B) Retail loans C) Real estate loans D) Credit card loans E) None of the above Answer: A 125. Which of the following is an example of a captive finance company? A) Bank of America B) GMAC C) Toyota Motors D) Koch Industries E) All of the above Answer: B 126. Lloyd Blenman is building a shopping center in Charlotte and needs to get a loan until the shopping center is finished and he can get a mortgage on the property. What type of loan does he need? A) Self-liquidating inventory loan B) Working capital loan C) Interim construction financing D) Security dealer financing E) Retailer and equipment financing Answer: C 127. Dick Dowen needs a loan to buy plants and fertilizer for his nursery for the spring planting season. This loan will automatically be paid off as the plants and fertilizer are sold to his customers. What type of loan does Dick need? A) Self-liquidating inventory loan B) Working capital loan C) Interim construction financing D) Security dealer financing E) Retailer and equipment financing Answer: A 128. Randal Ice needs a loan to purchase pet food and other pet supplies for his local pet store over the next six months. He has estimated that the maximum amount of inventory he will need in the next six months is $200,000 and he knows that he will have to use accounts receivables and the inventory he purchases as collateral for the loan. At the end of six months, he hopes he can get the loan renewed. What type of loan does Randal need? A) Self-liquidating inventory loan B) Working capital loan C) Interim construction financing D) Security dealer financing E) Retailer and equipment financing Answer: B 129. Barbara Miller is a small dealer who specializes in healthcare stocks. She needs a loan so that she can sustain her portfolio of stocks until customer buy orders catch up with what she has already purchased from the market. She only expects to need this loan for a week. What type of loan does Barbara need? A) Self-liquidating inventory loan B) Working capital loan C) Interim construction financing D) Security dealer financing E) Retailer and equipment financing Answer: D 130. Sight n’ Sound is a retail store that sells refrigerators, washers, dryers and other consumer appliances. They need a loan so they can place an order with Whirlpool. The appliances will be the collateral for the loan and as an appliance is sold, the money will be passed on to the lender. An employee of the lender will periodically check to make sure what has sold and what remains in the store. What type of loan does Sight n’ Sound need? A) Self-liquidating inventory loan B) Working capital loan C) Interim construction financing D) Security dealer financing E) Retailer and equipment financing Answer: E 131. Mary Williams needs to purchase a new bulldozer and excavator for her construction business and wants to repay the loan over the next three years in regularly scheduled payments. What type of loan does Mary need? A) Term business loan B) Revolving credit financing C) Long term project loan D) LBO loan E) Syndicated loan Answer: A 132. The Ford Motor Company needs to borrow $50 million. The First National Bank creates a packaged loan with several other banks to lend to Ford Motor Company. This loan package can be sold on the secondary market and carries a rate that is 500 basis points above LIBOR. The First National Bank expects this loan package to ultimately be held by a finance company looking for a good return on their money? What type of loan is this mostly likely to be? A) Term business loan B) Revolving credit financing C) Long term project loan D) LBO loan E) Syndicated loan Answer: E 133. The Wabash Washing Machine Company has arranged to get a loan from their bank over the next five years. They can borrow up to a pre-specified limit and repay it as many times as they need until the loan matures. The Wabash Washing Machine Company has not pledged any specific collateral for this loan. What type of loan is this mostly likely to be? A) Term business loan B) Revolving credit financing C) Long term project loan D) LBO loan E) Syndicated loan Answer: B 134. The Jung Company and the Nguyen Company have combined to build a new container ship docking facility in Charleston Harbor. The facility is expected to take two years to complete and cost $3 billion to construct. These companies want to borrow money in order to build this facility. What type of loan is this most likely to be? A) Term business loan B) Revolving credit financing C) Long term project loan D) LBO loan E) Syndicated loan Answer: C 135. The management of the Frickel Frontier Freight Company wants to take the company private by borrowing money and using the proceeds of the loan to purchase the shares of the company in the market. Management believes they can increase revenues enough to be able to pay off the loan. What type of loan is management getting? A) Term business loan B) Revolving credit financing C) Long term project loan D) LBO loan E) Syndicated loan Answer: D 136. A bank wants to examine how well customer controls their expenses. They are most likely to look at which of the following ratios? A) Wages and Salaries/Net Sales B) Accounts Receivables/(Annual credit sales/360) C) Net income after taxes/Net Sales D) Income before interest and taxes/Interest payments E) (Current assets – Inventory)/Current liabilities Answer: A 137. A bank wants to examine how well a customer uses assets to generate sales. They are most likely to look at which of the following ratios? A) Wages and Salaries/Net Sales B) Accounts Receivables/(Annual credit sales/360) C) Net income after taxes/Net Sales D) Income before interest and taxes/Interest payments E) (Current assets – Inventory)/Current liabilities Answer: B 138. A bank wants to examine how well a customer markets their goods and services. They are most likely to look at which of the following ratios? A) Wages and Salaries/Net Sales B) Accounts Receivables/(Annual credit sales/360) C) Net income after taxes/Net Sales D) Income before interest and taxes/Interest payments E) (Current assets – Inventory)/Current liabilities Answer: C 139. A bank wants to examine the adequacy of a business customer’s earnings based on the coverage ratios. They are most likely to look at which of the following ratios? A) Wages and Salaries/Net Sales B) Accounts Receivables/(Annual credit sales/360) C) Net income after taxes/Net Sales D) Income before interest and taxes/Interest payments E) (Current assets – Inventory)/Current liabilities Answer: D 140. A bank wants to know whether a customer can raise cash in a timely fashion at a reasonable cost. They are mostly likely to look at which of the following ratios? A) Wages and Salaries/Net Sales B) Accounts Receivables/(Annual credit sales/360) C) Net income after taxes/Net Sales D) Income before interest and taxes/Interest payments E) (Current assets – Inventory)/Current liabilities Answer: E 141. A bank has a concern about the Wilson Company’s debt level. They feel that it is too high. What ratio are they most likely to examine to answer this question? A) Selling and administrative expenses/Net sales B) Net sales/Total assets C) Current assets-Current liabilities D) Net income/Total assets E) Long term debt/(Long term debt + Net worth) Answer: E 142. A bank has a concern because they feel that a firm has an excessive amount of assets. They do not feel that the firm is efficient in generating sales from their current level of assets. What ratio are they most likely to examine to answer this question? A) Selling and administrative expenses/Net sales B) Net sales/Total assets C) Current assets-Current liabilities D) Net income/Total assets E) Long term debt/(Long term debt + Net worth) Answer: B 143. A bank feels that a firm has expenses that are too high. What ratio are they most likely to examine to address this concern? A) Selling and administrative expenses/Net sales B) Net sales/Total assets C) Current assets-Current liabilities D) Net income/Total assets E) Long term debt/(Long term debt + Net worth) Answer: A 144. A bank is concerned because they feel that a firm will not be able to raise enough cash to pay bills that are due within the next year. What ratio are they most likely to examine to address this concern? A) Selling and administrative expenses/Net sales B) Net sales/Total assets C) Current assets-Current liabilities D) Net income/Total assets E) Long term debt/(Long term debt + Net worth) Answer: C 145. A bank wants to examine the financial success of a company by examining the profits of a company. What ratio will help the bank examine this issue? A) Selling and administrative expenses/Net sales B) Net sales/Total assets C) Current assets-Current liabilities D) Net income/Total assets E) Long term debt/(Long term debt + Net worth) Answer: D 146. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition this bank discovered that the firm had $2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s net profit margin? A) 10.00% B) 22.22% C) 44.44% D) 50% E) None of the above Answer: A 147. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition this bank discovered that the firm had $2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales (all of which are on credit and $2000 in net income. What is this firm’s average collection period? A) 18 days B) 45 days C) 72 days D) 162 days E) None of the above Answer: B 148. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition this bank discovered that the firm had $2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s net working capital? A) $9000 B) $4500 C) $4000 D) $2000 E) None of the above Answer: D 149. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition this bank discovered that the firm had $2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s leverage ratio? A) 22.50% B) 44.44% C) 50.00% D) 88.89% E) None of the above Answer: C 150. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition this bank discovered that the firm had $2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s acid test ratio? A) 1.00 B) 2.00 C) 0.33 D) 3.00 E) 1.50 Answer: E 151. Banks need to be able to compare the firm they are examining to its industry. One company that provides information to banks about the industries their customers are in is: A) Standard and Poors B) Moody’s C) Dun and Bradstreet D) Morgan Stanley E) None of the above Answer: C 152. A firm has net sales of $25,000, costs of goods sold of $10,000, selling, general and administrative expenses of $8000 (of which $2000 are depreciation expenses) and taxes (in cash) of $3000. What is this firm’s operating cash flow (using the traditional or direct method)? A) $4,000 B) $15,000 C) $5,000 D) $8,000 E) None of the above Answer: C 153. A bank wants to estimate a firm’s future financial condition. Which of the following is something that allows a bank to do this? A) Statement of cash flows B) Pro forma statement C) Balance sheet D) Income statement E) None of the above Answer: B 154. A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%. They have also estimated that the term risk premium is .5%. What is the interest rate this bank will charge if they use the cost plus pricing model? A) 8.5% B) 9% C) 12% D) 9.5% E) None of the above Answer: A 155. A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%. They have also estimated that the term risk premium is .5%. What is the interest rate this bank will charge if they use the price leadership model (and the prime rate as their base rate)? A) 8.5% B) 9% C) 12% D) 9.5% E) None of the above Answer: B Test Bank for Bank Management and Financial Services Peter S. Rose, Sylvia C. Hudgins 9780073382432, 9780078034671
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