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 percent 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

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

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

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

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

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

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 percent b. 20 percent c. 30 percent d. 40 percent e. 60 percent

a Profit Margin = Net Income/Sales = ($2,000 - $800 - $600 - $400)/$2,000 = .10

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

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

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 percent b. 20 percent c. 30 percent d. 40 percent e. 60 percent

b Profit Margin = Net Income/Sales = ($1,000 - $400 - $200 - $200)/$1,000 = .20

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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