CEC Course Exam Final

Which of the following would be the primary objective of a negative covenant in a loan agreement? A. to enable early detection of financial deterioration B. to establish a means of communication with a borrower C. to preserve cash flows for debt repayment D. to provide assurance that a loan will be repaid

C

ABC corp has encountered financial difficulty in the past year and experienced substantial management turnover during that time. Although loan payments remain current and the bank has attempted to work with the new management team to identify causes of the performance problems, the company has decided to file bankruptcy. Which of the following effects of the bankruptcy is LEAST likely to affect the bank? A. monthly loan payments prior to the filing must be returned B. No legal actions to collect the loan may be taken C. Additional collateral assigned in the last three months may be voided D. the bank may not setoff its claims against the company's accounts at the bank

A

FAR Corporation imports high quality chocolate, distributing to large regional candy makers as the primary ingredient in their branded chocolate confections. The company purchases from five sources. Two of the sources are in a country that recently erupted into what is believed will be lengthy and violent political turmoil. High quality chocolate is now in short supply, and FAR has been unable to secure acceptably priced replacement suppliers for about 23% of its needs, because the world's candy and food giants have pre-existing contingency contracts that guarantee access to chocolate during a serious supply disruption. FAR does not have comparable contingency arrangements. Assume you are developing a financial projection for the next twelve months. To date, FAR has been very profitable and has very positive cash flow. Which of the following projection variables are most critical to use in a sensitivity analysis that tests the company's continued ability to generate cash flow needed to service term debt? A. sales growth % and gross profit margin B. gross profit margin and inventory days C. sales growth % and inventory days D. gross profit margin and receivable days

A

What are the most important considerations when determining if a business's cash flow should be included in global cash flow? A. Borrower can document ownership and access to the business's cash flow, and the business is sufficiently liquid to support its withdrawal B. Borrower is the majority or sole owner of the business and maintains exclusive or majority control over its cash flow C. Business has financial statements and tax returns prepared on the same accounting basis as the borrowers and these demonstrate little or no financial co-dependency D. Business has the capacity to assume actual contingent liabilities without incurring excess leverage and/or exceeding prudent debt service requirements

A

When a business property sale is reported on Form 4797 of a Form 1040, which of the following statements best describes how this data should be handled in a global cash flow? A. Include the sales proceeds net of any debt repayment and expenses of sale if sales activities occur regularly B. Include net gains or losses on sales made through a partnership or subchapters s corp C. exclude any sales proceeds unless the seller has provided direct financing to the purchaser D. exclude net gains from the sale of stocks held for longer than one year and gross proceeds from stocks owned less than a year

A

When considering Form 1040 "wages, salaries, and tips" as a source of cash in the global cash flow formula, one must recognize that the amount reported A. is net of any pre-tax payroll allocations B. includes amounts not corroborated by a W-2 C. is gross of Medicare deductions D. does not include wages from closely held corporations

A

When evaluating creditworthiness all of the following are reasons that banks and business owners focus attention on capital structure EXCEPT: A. appropriate capital structure insures the operating profitability of the business B. appropriate capital structure is necessary to implement the business strategy C. appropriate capital structure can help the business through economic downturns D. appropriate capital structure suggests the ability to meet obligations as they come due

A

John and Mary Customer have submitted their current personal tax return that contains the following information on various forms and schedules Based on the information provided, what is the couple's cash flow? A. $137,850 B. $136,450 C. $135,500 D. $130,850

A inflow items:wages, interest, sole proprietor income, noncash depreciation and sales proceeds outflow items: taxes withheld

You have just completed a cash flow for a customer that shows the following results what is the customer's personal debt service coverage ratio? A. 2.84x B. 2.74x C. 2.34x D. 1.84x

A sum of first 6 items (21,300), divided by sum of last 2 items (7,500)

All of the following are reasons why bankers use tax returns when preparing a global cash flow EXCEPT: A. the taxpayer generally puts significant time and effort into compiling data for the tax return B. the tax return will likely show the highest amount of earned profit compared to a financial statement C. Tax returns are often prepared by trained third parties who are familiar with current tax laws D. The consistent format of tax return makes comparison of results to earlier years' data easier

B

As the credit analyst of Your Bank, you have been asked to assess the liquidity of Burgess Corp, a distributor of office supplies. Which of the following measures would provide the most accurate measure of liquidity? A. NWC B. Quick ratio C. Current ratio D. working capital/sales

B

If a company has negative net cash income, which of the following observations is true? A. the company did not generate enough cash flow from sales to cover cash production costs B. The company did not generate enough net cash after operations to cover interest and dividends C. the company did not generate enough cash after operations to pay its taxed D. the company did not generate enough cash profits to cover its cash operating expenses

B

In estimating cash flows from a business tax return, which of the following steps are taken? A. subtract depreciation and amortization B. add decreases in AR balances C. Subtract increases in AP balances D. add dividends and distributions paid

B

In which company lifecycle stages is a company most likely to be profitable? A. Introductory and Growth B. Growth and Mature C. Mature and declining D. Introductory and declining

B

Once a problem loan has been identified, which of the following best describes the order in which a resolution should be reached? A. identify the cause/s of the problem, determine resources available to cure the problem, and implement a plan to address the problem B. the borrower and banker recognize a problem, then examine internal operations and external factors to determine the cause, and assess resources available to address the problem C. after identifying a problem and determining the cause/s (internal ops and or external factors), the banker develops a plan to address the problem D. after the internal operational issues and external factors that led to a problem are determined, the banker determines whether to call an event of default

B

Personal credit scores are relevant when considering a commercial loan to a business because: A. they provide an indication of ability to pay rent B. they are valid indicators as to a business management ability C. they are useful in determining the business loan amount that can be qualified D. they provide information about loans guaranteed by the business owner

B

The basis for reporting assets on personal financial statements is A. historical cost B. current fair market value C. taxable basis D. amortized cost

B

Weatherproof windows is a manufacturer of replacement windows for residential use. The company reports fixed asset turnover ratios as follows for the last four years: Y1: 5.4x, Y2:6.0x, Y3:6.2x, Y4:1.45x which statement is the most logical reason for the change in turnover seen in Y4? A. company's sales grew sharply in Y4 B. company opened a new plant in Y4 C. company changed it's sales mix in Y4 D. company sold some of its delivery trucks in Y4

B

When a corporate tax return indicates that it is a consolidated return, it signifies that: A. there are intercompany loans and advances B. A list of subsidiaries is provided C. An additional controlled group tax is due D. There are parent guaranties of subsidiary debt

B

When using the net method to construct a global cash flow, which of the following cash outflows require and estimate? A. Federal income taxes paid B. Personal living expense C. State and local income taxes paid D. Real estate taxes paid

B

Which of the following tax payments for salaried individuals is determined from Form W-2? A. estimated tax payments B. Social security tax payments C. alternative minimum tax payments D. Capital gains tax payments

B

Which of the following warning signs of financial difficulty would be less detectable on a company's financial statement? A. slow payment of key trade suppliers and delinquent tax payments B. deferral of equipment maintenance and cutback on staff training C. higher line borrowings and sale of production assets D. Lower cash balances and reduction of staff through layoffs

B

Which type of entity is potentially subject to a "built-in gains tax"? A. C Corp B. S Corp C. general partnership D. LLC

B

A company with current-year sales of $4,500,000 and COGS of $3,248,000 reduced its inventory days from 119 days in the prior year to 115 days for the current year. Its receivable days slowed from 40 days to 43. What was the cash flow effect of these swing-factor efficiency changes? A. no cash flow effect B. ($1,000) C. $9,000 D. $12,000

B change in receivable went from 493(4500/365x40) to 530(4,500/365x43), which is an increase (outflow) of $37 inventory went from $1059 (3,248/265x119) to $1,023(3,248/365x115), which is a decrease of $36. net cash flow effect is $36-$37

A bridge loan typically displays which of the following characteristics? A. a term in excess of one year with a single repayment at maturity B. Repayment from operating cash flow and secured by receivables C. Repayment of the sale of equipment or real estate for example with a term of one year or less D. Interest only payments with a clean-down period required

C

A company's accounts payable days have increased from 14 to 37. Which of the following explanations suggests the least appropriate management decision from the bank's perspective that lead to this change? a) Management decided to stock commonly purchased items formerly sold as special-order merchandise. They relinquished some trade discounts by extending payments to suppliers to finance the inventory. The net effect on cash flow was a small increase in net cash after operations. b) Management purchased extra inventory, at a very attractive price, from a supplier left with excess stock after its own largest customer canceled an order. The supplier agreed to extend terms for the purchase. The net effect on cash flow was a slight decrease in net cash after operations. c) Management used supplier credit to reduce its bank line of credit, so it could meet a debt service coverage covenant on a term loan. Relinquished supplier discounts offset the saved interest expense. The net effect on cash flow was a significant increase in net cash after operations. d) Management extended its supplier payments to manage cash flow during very slow seasonal sales caused by unusually harsh weather conditions. Inventory days have increased, and the company relinquished supplier discounts. The net effect on cash flow was a small decrease in net cash after operations.

C

A distributor of office equipment has experienced moderate sales growth in each of the last three years while gross and operating profit margins have remained stable. Each year the company has shown a declining amount of cash after operations. What is the cause of the declining cash after operations? A. higher dividend and interest payments B. Increasing reliance on trade creditors C. Less efficient inventory management D. Acquisition of new capital equiptment

C

As part of analyzing a problem loan, a banker will complete all of the following steps EXCEPT: A. complete a new lien search B. Perform an updated financial analysis C. Hire a turnaround consultant D. Order an updated appraisal on collateral

C

Clara's Costumes is a retailer of costumes, primarily purchased for Halloween. Which of the following characteristics would most likely be present in Clara's financial statements? A. Inventory will increase immediately following the seasonal peak B. The need for credit will be lowest during the high point in the operating cycle C. Receivables will increase after the increase in inventory D. Fixed asset spending will be highest at the seasonal peak

C

In which company lifecycle stage is a company most likely to invest in equipment that adds efficiency? A. Introductory B. Growth C. Mature D. Declining

C

John Mayer started Mayer Architectural Associates 35 years ago and has built a stable base of clients and a sound management team. He plans to retire in a year and his key managers want to purchase the business from him, but have little equity to contribute. Given this situation, which of the following would be most appropriate source of financing for the buyout? A. revolving credit B. term loan C. seller note D. bridge loan

C

Six months ago a high fashion retailer opened an outlet store to sell out-of-season goods left over from its main location. A review of the retailer's current year results compared to prior years is likely to show which of the following results? A. lower sales growth B. higher operating margin C. lower gross profit margin D. higher income taxes

C

Tax law provides for a variety of deductions that can be used by businesses or their owners (if business is taxed at the ownership level). Which of the following deductions would be available only to C corporations and not to S-corps, partnerships, LLCs and their owners? A. Domestic production activities deduction B. Net operating loss carryforwards C. Dividends received deduction D. Section 179 expense deduction

C

The economy is entering the late contraction stage of the business cycle. Your Bank has four customers requesting an increase to their lines of credit. Assuming their overall creditworthiness is comparable, which of the following customers would exhibit the least risk to the Bank? A. a wholesaler of floor coverings B. An upscale children's clothing boutique C. A beer and soda distributor D. a temporary staffing firm

C

When developing the structure of a loan, which of the following are least critical to consider? A. the cash flow and collateral available for repayment B. The customers sensitivity to pricing and restrictive covenants C. the need to meet a much lower rate offered by a competitor D. the type of loan offered based on the loan purpose

C

When the tax return indicates alimony, which of the following additional expenses should the analyst be alert for? A. medical expenses B. mortgage interest C. child support D. rent expense

C

Where is a lender most likely to look for evidence of a fraud in financial statements received from a borrower in support of a loan request? A. understating the balance of receivables B. overstating payables owed to the trade C. Including contingent sales sales in revenues D. Accelerating recognition of expenses

C

Which business entity exposes an owner to potential liability for business obligations? A. C corp B. S corp C. general partnership D. LLC

C

Which of the following actions is most likely to negatively impact an individuals credit score? A. paying off the balance on a revolving credit instead of making monthly payments B. Under-utilization of a home equity LOC C. closing out a well-established credit card account with good payment history D. Applying for a new auto loan every 5 years

C

Which of the following best describes the order in which a manual projection is constructed? A. the amount of existing and new debt is determined to project interest and principal payments B. cap ex and working capital needs are forecast to estimate total borrowing needs C. the income statement is constructed before calculating the swing factors and other elements on the balance sheet D. Net income and dividends are projected to determine retained earnings and total net worth on the balance sheet

C

Which of the following events would create a cash inflow in a DCF statement? A. stable sales with declining margins B. longer customer payment terms C. slower payment of trade creditors D. pay off existing bank debt

C

Which of the following expenses is not included in an income statement? A. Interest expense B. Depreciation C. Principal repayment D. Repairs and maintenance

C

You are calling for the first time on the owner of a successful local business that currently banks with another bank in your market. You are very interested in developing a banking relationship with the business and its owner. Which of the following goals will be most important to achieve in the initial meeting? A. obtain a commitment from the owner to open a checking account at your bank B. Offer a term sheet outlining a loan at a competitive rate C. Learn about the owner's business and personal objectives D. Gather the most recent financial statements on the business

C

You are preparing to meet with the owner of a successful retailer of apparel geared to young professionals. The owner has obtained and outfitted a second location in a high traffic retail mall in preparation for its planned opening and has asked to meet with you to discuss a possible financing need. Based on the industry, the owner will most likely have a need for: A. a commercial mortgage loan to purchase a new location B. a lease to fund the acquisition of store fixtures C. a line of credit to purchase inventory for the upcoming season D. a term loan to purchase a point-of-sale system

C

XYZ Partnership submitted a current tax return showing the following balance sheet entries: AR: beg year=$5,675 end year=$8,905 Inventory: 15,450 13,360 other current assets: 2,105 2,450 how much did the combined asset changes impact the partnership's operating CF in the current year? A. ($3,575) B. ($1,745) C. ($1,485) D. ($1,140)

C (end of year balances minus beginning year balances)

Parsons and Associates is a highly regarded business financial advisory firm located in a downtown office building that was founded thirty-five years ago by Grant Parsons. Your bank has a long-term relationship with both the business and the founder. You recently saw Grant Parsons at a bank-sponsored economic outlook forum and he suggested you stop by his office to discuss some potential opportunity. Based on the type of company and the life cycle stage, which of the following do you think is the most likely opportunity to be discussed? A. A mortgage to fund the purchase of a new building B. A line of credit to fund a seasonal buildup in receivables C. A term loan to fund the buyout of his interest by his partners D. A new loan to refinance his home mortgage

C.

All of the following statements are part of the definition of global cash flow EXCEPT: A. it quantifies cash inflows and outflows for individuals and their closely held businesses B. the goal is to surface contingent risks that could negatively impact debt service C. both business and personal debt service is included in debt service D. the tool provides a roadmap that addresses all situations

D

Analysts refer to the Form W-2 to determine personal cash flows when the client is A. self-employed B. member-manager LLC C. retiree with pension benefits D. employee of a corporation

D

CF from items reported on page 1 of the Form 1040 includes which of the following A. partnership income B. capital losses C. net operating losses D. unemployment compensation

D

Cheap Stuff, ltd. is a distributor of goods to discount stores. The company has experienced 12% sales growth over the last three years. Despite continued economic declines projected, the company is forecasting continued sales growth of 10-15% each year over the next 3 years. Which of the following sources of financing would be most appropriate to support related increases in receivables and inventory? A. demand note B. seasonal line of credit C. bridge loan D. revolving line of credit

D

Crown Properties, LLC develops and owns a number of fully-occupied commercial properties. Crown Properties' ownership includes the following: Crown Development Corporation, a major regional developer with substantial financial resources (15%), Maxwell Crown, largest shareholder of Crown Development and a customer of your bank's trust department (5%), and Maxwell's four children, all of whom are under the age of 22 (20% each). In setting the structure for a loan to Crown Properties, which of the following support would provide the bank the most protection? A. Maintenance agreements from each of the 20% owners of crown properties B. a collection of guaranty from Crown C. comfort letters from each of the six owners of Crown D. Payment guaranties from Crown and Maxwell

D

During a recent meeting with Your Bank's loan committee, you were asked to determine why Clear Lights, a manufacturer of lights used in office buildings, requested financing. It was stated that the company has positive cash flow after debt amortization. What then would be the cause of the financing request? A. operating expenses B. dividend payments C. interest expense D. capital expenditures

D

GCC, Inc. is a local firm that provides general contracting services to commercial real estate developers operating in your region. In assessing the sustainability of the company's revenues, which of the following questions would be least relevant to ask? A. what is your current backlog of contracts? B. how many developers do you work with? C. What is the outlook for the economy in the region? D. How much did your sales grow last year?

D

Gruper Home Appliances, Inc., a manufacturer of kitchen appliances, sells 70% of its goods to X-Mart, a large national retailer of consumer durables. Which of the following best describes the reason why Gruper has a low degree of bargaining power with X-Mart? A. There are no substitutes for the product B. The suppliers have high variable costs C. Customers have brand loyalty D. Sales are concentrated with a large volume buyer

D

In which industry lifecycle stage would companies be most likely to focus on cost discipline? A. Introductory B. Growth C. Mature D. Decline

D

Rose's Posies is a local florist with several locations in the county. You met the owner recently and she has asked to speak with you about a potential loan request. Which of the following would be the most typical type of loan this company would require? A. a term loan to acquire capital assets B. a revolving credit to fund long-term sales growth C. a mortgage loan to acquire one of the store locations D. a seasonal line of credit to fund inventory build-up

D

Sandy's seaside sundries sells a range of products at the New Jersey shore, including sunscreen, beach toys, and beach apparel during the summer season. Which of the following types of financial information would be most relevant in determining both the amount and duration of a seasonal financing need for the company? A. three years of company tax returns B. audited statement and a 6month interim C. 5-year annual projections D. Monthly cash budget or interims

D

The Conference Board's Report of Economic Indicators recently published the following report: "The Conference Board announced today that interest rates remain low. Reports indicated that companies are holding lower inventories and capital expenditures have decreased. The availability of credit continues to be tight" Based on the above report, which of the following best describes the current stage in the general business cycle? A. Early Expansion B. Late Expansion C. Early contraction D. Late contraction

D

The NBER has released a report that suggest the economy is showing signs that it is moving into early contraction. You review your current portfolio to develop a list of customers that are likely to fare best through this cycle. Which of the following would be included on your list? A. A plumbing supplies distributor B. A local high school fashion retailer C. A manufacturer of auto engines D. A local accounting firm

D

The covenants of a loan agreement should serve which of the following purposes? A. they legally "profit" the bank's collateral position and list events of default and their remedies B. they are designed to insure timely repayment and keep the bank informed as to financial performance C. They identify key risks in a borrower's operating profile and restrict management's ability to make daily operating decisions D. They enable the bank to spot signs of deterioration and provide a means of communication with the borrower

D

When reviewing a Form 4562, what information will a lender learn about the business? A. the amount of any capital gains tax payments B. The amount of proceeds received from used equipment sales C. The amount of proceeds from securities sales D. the amount of any fixed asset purchases

D

When underwriting the annual debt service requirement for a business line of credit, it is prudent to use the A. interest actually paid over last 12 months B. average interest actually paid over last 36 months C. anticipated interest to be paid over the next 12 months D. interest that would be paid over the next 12 months assuming a fully extended line

D

Which of the following companies report consumer credit information? A. Experian and TRW B. Fair-isaac and Equifax C. TransUnion and TRW D. Equifax and Experian

D

Which of the following events is most likely to lead to a business failure? A. Recruiting a new CEO from a major industry competitor B. failing to achieve budgeted sales growth in one year C. receiving a term loan from the majority shareholders D. Controlling personnel costs by hiring family members

D

Which of the following sources of information is least critical when developing a set of projections? A. past operating results of the company B. Management reports including business plan, strategic objectives, mission statements, management and forecasts C. industry and economic reports D. organizational charts and job descriptions

D

Which of the following statements best describes the relationship between product and industry lifecycle stages? A. a product's lifecycle stage by definition coincides with its industry's lifecycle stage B. product lifecycle stages generally lag their industry by one stage C. product lifecycle stages generally lead their industry by one age D. Individual products can be variable in their lifecycle timing compared to overall industry stage

D

Which of the following would be considered a variable cost? A. cost of property and casualty insurance B. Salary paid to the CFO C.rent of the production and office facilities D. wages paid to customer service reps

D

A customer submitted a personal financial statement when requesting a new, unsecured personal loan. In addition to the information below, a lien search reports an unpaid federal tax lien of $20,000. Detail in the personal financial statement shows that the residence was purchased two months ago for $820,000. What would the customer's adjusted net worth be? A. $321,000 B. $301,000 C. $121,000 D. $101,000

D in calculating adjusted net worth, the value of the personal property would be deducted from total assets while the amount of the tax lien revealed in the lien search would be added to the other reported liabilities, leaving adj net worth= $101,000

Your manager has asked you to prepare an analysis for a borrowing request at Your Bank. Which of the following tasks are you most likely to complete first? A. Prepare a term sheet B. Create a projection C. Analyze the company's available collateral D. Evaluate the company's business strategy

D.