Bank Management Chapter 14

35. Many bankers focus on eliminating the error of denying a loan to a customer who ultimately would repay the debt.

False

37. Financial statements that have been audited are guaranteed to be 100% accurate.

False

41. Negative cash flow will automatically eliminate the possibility that a bank will loan a firm funds.

False

43. A low days inventory on hand and a high inventory turnover relative to industry norms indicates less efficient inventory management and/or more liquidity.

False

36. A borrower making a changing their accountant could be viewed as a negative signal regarding the borrower's condition.

True

38. A firm generally should not count on collateral as the primary source of payment.

True

39. Common size ratio comparisons enable comparisons across firms in the same industry.

True

40. Every balance sheet and income statement item must be recognized on a cash-based income statement.

True

42. On the cash-based income statement, depreciation is a source of funds.

True

44. Pro forma analysis is a form of sensitivity analysis.

True

Use the following information on Dylan Enterprises for questions 20 - 26. Income Statement Net Sales $320,000,000 Less: Cost of Goods Sold $162,000,000 Gross Profit $158,000,000 Less: Operating Expenses $120,000,000 Less: Depreciation $11,000,000 Operating Profit $27,000,000 Less: Interest Expense $8,500,000 Net Profit Before Taxes $18,500,000 Less: Taxes $6,290,000 Net Income $12,210,000 Earnings Available to Common $12,210,000 Dividends Paid (60% of EAC) $7,326,000 Addition to Retained Earnings $4,884,000 Earnings Per Share $6.11 Balance Sheet Assets Current Year Prior Year Change Cash $1,500,000 $3,000,000 ($1,500,000) Marketable Securities $1,500,000 $3,200,000 ($1,700,000) Accounts Receivable $57,000,000 $44,000,000 $13,000,000 Inventory $106,000,000 $99,000,000 $7,000,000 Pre-Paid Expenses $8,400,000 $11,000,000 ($2,600,000) Total Current Assets $174,400,000 $160,200,000 $14,200,000 Long-Term Assets $148,000,000 $154,000,000 ($6,000,000) Total Assets $322,400,000 $314,200,000 $8,200,000 Liabilities Current Year Prior Year Change Accounts Payable $8,716,000 $6,400,000 $2,316,000 Short-Term Debt $102,000,000 $105,000,000 ($3,000,000) Total Current Liabilities $110,716,000 $111,400,000 ($684,000) Long-Term Debt (8%) $115,000,000 $111,000,000 $4,000,000 Total Liabilities $225,716,000 $222,400,000 $3,316,000 Common Stock ($1 Par) $2,000,000 $2,000,000 $0 Paid-In Capital $65,000,000 $65,000,000 $0 Retained Earnings $29,684,000 $24,800,000 $4,884,000 Total Equity $96,684,000 $91,800,000 $4,884,000 Total Liabilities and Equity $322,400,000 $314,200,000 $8,200,000 20. What were Dylan's cash receipts during the year? a. $307,000,000 b. $320,000,000 c. $323,000,000 d. $424,000,000 e. $482,000,000 21. What is Dylan's cash flow from operations? a. -$2,874,000 b. $8,126,000 c. $12,210,000 d. $19,126,000 e. $23,210,000 22. What is Dylan's current ratio for the current year? a. 1.36 b. 1.44 c. 1.58 d. 1.68 e. 1.71 23. What is Dylan's return on assets for the current year? a. 3.8% b. 5.1% c. 5.4% d. 12.6% a. 13.3% 24. What is Dylan's equity multiplier for the current year? a. 0.30 b. 0.63 c. 1.52 d. 2.67 e. 3.33 25. What is Dylan's return on equity for the current year? a. 3.8% b. 5.1% c. 5.4% d. 12.6% e. 13.3% 26. Next year, sales at Dylan are expected to increase by 10%. Also next year, the dividend payout ratio will not change, while gross profit, operating profit, net income, current assets and current liabilities will be the same percentage of sales as the current year. If the firm issues no new common stock, what will be the addition to retained earnings next year? a. $1,112,000 b. $2,746,200 c. $3,200,000 d. $4,884,000 e. $5,372,400

a. $307,000,000 b. $8,126,000 c. 1.58 a. 3.8% e. 3.33 d. 12.6% e. $5,372,400

16. A firm has the following financial statement data: Sales = $2,000, COGS = $800, Operating Expenses = $600, and Taxes = $400. What is the firm's profit margin? a. 10% b. 20% c. 30% d. 40% e. 60%

a. 10%

14. Which financial ratio measures a firm's ability to pay current interest and lease payments with current earnings? a. Fixed charge coverage ratio b. Return on equity c. Current ratio d. Inventory turnover e. Debt to total assets ratio

a. Fixed charge coverage ratio

3. Which of the following is not one of the essential issues in evaluating commercial loan requests? a. The structure of the borrower's board of directors. b. The character of the borrower. c. The use of the loan proceeds. d. The source of repayment for the loan. e. The amount the customer needs to borrow.

a. The structure of the borrower's board of directors.

27. The change in Net Fixed Assets equals: a. capital expenditures minus depreciation. b. capital expenditures plus depreciation. c. capital expenditures minus cash flow from operations. d. Gross fixed assets minus depreciation. e. Gross fixed assets minus cash purchases.

a. capital expenditures minus depreciation.

33. In loan participations, the _____ makes the original loan and sells participations. a. lead bank b. interbank c. loan production office d. holding firm e. originate bank

a. lead bank

13. A firm's ability to meet its short-term debt obligations is measured by: a. liquidity ratios. b. market value ratios. c. profitability ratios. d. activity ratios. e. leverage ratios.

a. liquidity ratios.

15. A firm has the following financial statement data: Sales = $1,000, COGS = $400, Operating Expenses = $200, and Taxes = $200. What is the firm's profit margin? a. 10% b. 20% c. 30% d. 40% e. 60%

b. 20%

28. At a minimum, cash flow from operations should cover: a. interest on long-term debt. b. dividends plus mandatory principal payments on debt. c. capital expenditures plus dividends. d. the change in marketable securities. e. dividends plus interest.

b. dividends plus mandatory principal payments on debt.

2. All of the following would be generally be considered acceptable commercial loan purposes except: a. seasonal cash needs. b. paying off other bank debts. c. purchasing new equipment. d. acquiring another firm. e. expanding plant capacity.

b. paying off other bank debts.

29. Under which category are dividends classified on the statement of cash flows? a. Cash From Investing Activities b. Cash From Operating Activities c. Cash From Financing Activities d. Cash From Profit Activities e. None of the above

c. Cash From Financing Activities

17. Cash flows from a firm's normal business activities are reflected in: a. cash flows from investing. b. cash flows from financing. c. cash flows from operations. d. cash flows from income. e. cash flows from budgeting.

c. cash flows from operations.

10. Common size financial statements convert figures to a common size by: a. dividing balance sheet items by total assets and income statement items by net income. b. dividing balance sheet items by net sales and income statement items by net income. c. dividing balance sheet items by total assets and income statement items by net sales. d. dividing balance sheet items by net sales and income statement items by total assets. e. dividing balance sheet items by total equity and income statement items by net sales.

c. dividing balance sheet items by total assets and income statement items by net sales.

4. Short-term working capital loans are generally repaid with funds from: a. investing cash flows. b. issuing new debt. c. reductions in inventory and receivables. d. issuing new equity e. redeeming marketable securities.

c. reductions in inventory and receivables.

34. Which of the following is NOT a type of credit enhancement? a. Excess cash flow b. Credit derivatives c. Loan guarantees d. All of the above are a type of credit enhancements e. a. and b. are NOT credit enhancements

d. All of the above are a type of credit enhancements

8. Why is liquidating collateral not a preferred means of loan repayment? a. It deprives the borrower of the opportunity to salvage the company. b. Transaction costs on liquidating collateral are often quite high. c. Bankruptcy laws may prevent liquidation to occur in a timely manner. d. All of the above. e. b. and c. only

d. All of the above.

9. Which of the following is not part of the four-stage process for evaluating the financial aspects of commercial loans? a. An analysis of the firm's management, operations, and industry. b. Performing financial ratio analysis. c. Analyze the firm's cash flow. d. Examining the backgrounds of the sales force. e. Project the borrower's financial condition.

d. Examining the backgrounds of the sales force.

18. All of the following are sources of cash except: a. an increase in long-term debt. b. a decrease in inventory. c. a new equity issue. d. a decrease in notes payable. e. an increase in accounts payable.

d. a decrease in notes payable.

11. How efficiently a firm is using its assets is measured by: a. liquidity ratios. b. market value ratios. c. profitability ratios. d. activity ratios. e. leverage ratios.

d. activity ratios.

31. A firm's borrowing base is: a. based on cash flow from operations. b. a measure of long-term profit potential. c. the amount of the firm's unused credit. d. an estimate of the available collateral on a company's current assets. e. a measure of net fixed assets.

d. an estimate of the available collateral on a company's current assets.

5. Term loans are generally repaid with funds from: a. investing cash flows. b. issuing new debt. c. reductions in inventory and receivables. d. cash flows from operations. e. redeeming marketable securities.

d. cash flows from operations.

6. All of the following are basic sources of cash flows except: a. liquidating assets. b. cash flows from operations. c. issuing new equity. d. liquidating liabilities. e. issuing new debt.

d. liquidating liabilities.

19. Which of the following is not a use of cash? a. A decrease in accounts payable b. An increase in inventory c. An increase in accounts receivable d. The payment of cash dividends e. An increase in wages payable

e. An increase in wages payable

30. Which of the following would cause a firm's ROE to be high, but its ROA to be low? a. A low gross profit margin but a high net profit margin. b. Financing a relatively large proportion of assets with equity. c. Paying very low interest rates on the firm's debts. d. Leasing a large amount of equipment. e. Financing a relatively large proportion of assets with debt.

e. Financing a relatively large proportion of assets with debt.

7. Which of the following characteristics should collateral have? a. The value of the collateral should not exceed the value of the loan. b. The collateral claim must be legal and clear. c. The lender must have a ready market for the collateral. d. a. and b. only. e. b. and c. only.

e. b. and c. only.

12. A firm's mix of debt and equity is measured by: a. liquidity ratios. b. market value ratios. c. profitability ratios. d. activity ratios. e. leverage ratios.

e. leverage ratios.

1. Firms may need cash for all of the following except: a. operating purposes. b. pay taxes. c. pay employee salaries. d. pay overdue suppliers. e. liquidate fixed assets.

e. liquidate fixed assets.

32. Many banks have changed their business model to a _____________ model. a. originate-to-keep b. originate-to-service c. originate-to-pay d. originate-to-lead e. originate-to-distribute

e. originate-to-distribute