rma exam

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

A beer and soda distributor

3rd Party support

A credit enhancement - not reason to make a loan.

you are preparing to meet with the owner of Style-For-Less, 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, you think the owner will most likely have a need for: a. A commercial mortgage to purchase the 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

A line of credit to purchase inventory for the upcoming season

he NBER has released a report that suggests 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 fashion retailer c. A manufacturer of auto engines d. A local accounting firm

A local accounting firm

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. A lower gross profit margin d. Higher income tax rate

A lower gross profit margin

Rose's Posies is a local florist with several locations in the county. You met the owner recently and she has asked to speak to 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 to fund inventory build-up

A seasonal line to fund inventory build-up

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 its 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 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 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.

A term loan to fund the buyout of his interest by his partners.

Using the information below, which statement best describes how ABC met its predominant financing need? a. ABC's operating cash flow was sufficient to cover its investing activities. b. ABC needed to use short-term debt to support the growth in receivables and inventory. c. ABC's capital expenditures were funded mostly by long-term debt. d. ABC used short-term debt to cover a portion of its interest expense.

ABC's capital expenditures were funded mostly by long-term debt.

What are the Characteristics of a Term Loan?

Acquire non-current assets, Supplement equity in support of permanent working capital. Maturity: 5-7 years depending on life of asset being financed. Collateral: Long-term asset. Risk: inability to generate additional cash flow in excess of operating cycle requirements. Sources of Repayment: Operating CF, Refinancing, Liquidation of assets, and Equity. Will lend a % of the fixed asset, Loan to Value.

Third Party Support

Additional resources promised or provided by parties outside the borrower, in support of repayment of the borrower's loan.

What are the four types of covenants?

Affirmative. Negative. Financial. Non-Financial.

Guarantee, Payment vs Collection.

Agree to make a payment, if they can't make a payment then we we can possess (collection).

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

Appropriate capital structure insures the operating profitability of the business

What are the two objectives of credit reports in commercial lending?

Assist in underwriting the character of owners. Credit Reports reflect "Propensity to Pay" not ability to pay.

What financial information is needed in credit analysis?

Balance Sheet, Income Statement, Statement of Cash Flows.

What are the key determinants of a loan structure?

Bank's Goals. Client's Goals. Sources of Repayment.

What are the Characteristics of a Bridge Loan?

Bridge a gap until a sale occurs, new financing is secured or new equity is acquired. Maturity 1 year or less. Collateral: Current and/or long-term assets. Risk: Failure of a specific event to occur in an amount or time period anticipated. Sources of Repayment: Sale of an asset, Refinancing, Liquidation of Assets, and Equity. Cash from the event. Document of repayment and close monitoring

types of Credit Reports

Bureau Reference Personal Knowledge Gut

Matching the concept. Covenants --> Business Drivers Tenor (ADR) LTV (Safety) Repayment Schedule Payment (Sound)

Business Drivers

conditional guarantee

Certain parameters.

Secured

Collateral on guarantee.

All credit should have a secondary source of repayment which normally takes the form of ________________ (____).

Collateral; safe

What does a presentation packet consist of?

Commercial Credit Authorization Narrative Summary Financial Information Supporting Information

What does the 3rd party support Add?

Contractual access to the outside net worth and outside sources of cash flow of interested parties.

What may be some reasons as to why companies borrow?

Cover expenses, buy assets, finance receivables, decrease in a liability account.

Subordination of Interest

Debt is subordinate (second) to some other debt. Can't default on one without defaulting on the first one. First bank has a claim above the second bank. Similar to preferred stock.

What is an appropriate capital structure?

Ensures successful implementation of company's business strategy. Creates ability to pay current and long-term obligations. Weathers unexpected financial adversity.

Individual Guarantee

Equal or pro-rata.

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

Evaluate the company's business strategy

Joint and Several Guarantee

Everyone is guaranteeing the full portion.

What Credit scoring model is used?

FAIR ISAACS Model, Created by William Fair and Earl Isaacs in 1956. Good credit = less risky Low credit = more risky. Gives lender insight into how much risk is involved with the customer.

Characteristics of a Permanent Working Capital or Revolving Working Capital Loan.

Finance both permanent and seasonal buildup of current assets. Grow company equity. Replace working capital depleted by purchases of I-T assets or losses. Maturity 1-3 years. Collateral: Receivables and Inventory Risks: Inability to generate cash flow over long-term or use of proceeds for non-current assets. Failed Season Sources of Repayment: Operating Cash Flow, Refinancing, Liquidation of assets, Equity.

What are some different types of Client's Goals? Why do they need a loan?

Fund operations. Need or want for the business. Are they looking to invest or fund business operations?

Unlimited Guarantee

Grantor will cover the full amount of liability.

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?

How much did your sales grow last year?

What is capital structure?

How they choose to source their assets. Capital structure = debt and equity.

What are sources of repayment?

In long-term CF generated from the business. Assess risk, if source of repayment is not strong obtain a stronger secondary source of repayment (collateral).

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 stage. d. Individual products can be variable in their lifecycle timing compared to the overall industry stage

Individual products can be variable in their lifecycle timing compared to the overall industry stage

What are the basic functions of the loan committee?

Interpret and implement bank loan policy and lending guidelines to align with the request. Set expectations for repayment. Determine if the collateral provided as security for the loan is sufficient. Review the industry and environment around the business to determine the overall support and stability.

Collective Arts and Crafts is a retailer that features the work of many local artisans. In developing questions to learn about the company's expense structure, which of the following would be most relevant to ask? a. Is any of your inventory sold on consignment? b. How many suppliers do you have? c. How is your sales staff compensated? d. Do you own your retail location?

Is any of your inventory sold on consignment?

Matching the concept. Collateral --> Business Drivers Tenor (ADR) LTV (Safety) Repayment Schedule Payment (Sound)

LTV (safety)

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.

Learn about the owner's business and personal objectives.

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 most logical 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 equipment

Less efficient inventory management

What are the characteristics of a seasonal line of credit?

Levels out cash flow, take advantage of supplier discounts and cover seasonal wages. 1 year maturity. Typical Collateral = Receivables/Inventory. Risk = Season does not happen (season failure), and bank will have to finance carry-over inventory. Sources of Repayment = Conversion of assets, refinancing, Liquidation of assets, equity.

What are critical covenants?

Maintenance - books, assets & existence. Right to inspect - books & assets. Insurance - property, liability, business interruption, life & health. Negative pledge - not pledge assets to others. No other borrowings for money. Cross collateral and default with other credit. Financial information - regular financial sts., compliance & borrowing certificates. Performance - liquidity, leverage & debt service.

acompany'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.

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.

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 six-month interim c. Five-year annual projections d. Monthly cash budget or interims

Monthly cash budget or interims

A third party support is a(n) __________________.

Outside Guarantee

Matching the concept. Purpose --> Business Drivers Tenor (ADR) LTV (Safety) Repayment Schedule Payment (Sound)

Payment (sound)

What are the different types of third party support?

Personal Guarantees Corporate or other Business Entity Guarantees. Contractual Guarantee. Subordination of Interest.

Why is information important when reviewing a loan?

Provides power to make decisions. Obtains monthly information: sales, profits, receivables, inventory and trade debt. Obtain annual budget, forecast or projection. Verify data with audit and/or tax return. Show client how info was used to structure credit.

Financial Covenant

Ratios, either positive or negative. Current ratio must stay above 2%.

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 inventories d. Fixed asset spending will be highest at the seasonal peak

Receivables will increase after the increase in inventories

What are the objectives a loan covenant?

Receive full disclosure, Protect net worth, cash flow, liquidity and asset quality. Provide timely warning signs. control growth, Maintain key management, assets and records, assure legitimacy and going concern, profitability for the bank.

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 from 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

Repayment from the sale of equipment or real estate for example with a term of one year or less

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

Sales are concentrated with a large volume buyer

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 foodgiants 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.

Sales growth % and gross profit margin

What is a loan covenant?

Specific written agreement between between bank and borrower details conditions borrower must meet. Violating covenant results in the loan being in default.

Matching the concept. Life of the asset --> Business Drivers Tenor (ADR) LTV (Safety) Repayment Schedule Payment (Sound)

Tenor (ADR)

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 taxes. d) The company did not generate enough cash profits to cover its cash operating expenses.

The company did not generate enough net cash after operations to cover interest and dividends

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: [Year 1: 5.4x Year 2: 6.0x Year 3: 6.2x Year 4: 1.45x] Which statement is the most logical reason for the change in turnover seen in Year 4? a. The company's sales grew sharply in Year 4. b. The company opened a new plant in Year 4. c. The company changed its sales mix in Year 4. d. The company sold some of its delivery trucks in Year 4.

The company opened a new plant in Year 4.

unconditional guarantee

The guarantee should make its promise unconditionally - no strings attached

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. Capital expenditures 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.

The income statement is constructed before calculating the swing factors and other elements on the balance sheet.

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 customer's 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

The need to meet a much lower rate offered by a competitor

The covenants of a loan agreement should serve which of the following purposes? . A. They legally "perfect" 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

They enable the bank to spot signs of deterioration and provide a means of communication with the borrower

Affirmative Covenant

Things that the company will do. ex: Financial Statements will be provided monthly, quarterly financial statements.

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

To preserve cash flows for debt repayment

Bureau

Traditional Credit Report, Personal & Business

Maintenance Agreement

Typically promises to ensure that a subsidiary maintains minimum financial characteristics, such as net worth or debt service coverage, but does not incorporate guarantee language. Some maintenance agreements provide only general references of intent to stand by a borrowing company and are of little practical use to the bank in its collection efforts.

Which of the following would be considered a variable cost? a. The cost of property & casualty insurance b. Salary paid to the chief financial officer c. Rent on the production and office facilities d. Wages paid to customer service representatives

Wages paid to customer service representatives

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 the most appropriate source of financing for the buyout? a. A revolving credit b. A term loan c. A seller note d. A bridge loan

a seller note

Comfort letter

an informal promise to stand by another entity (such as subsidiary or other related party) that falls substantially short of a legally enforceable guarantee.

What does the individual profile contain?

any guarantees.

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 had positive cash 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

capital expenditures

True Guarantee vs "Comfort letter" or Maintenance Agreement

comfort Letter also known as letter of support. Letters of moral commitments given to obligations. These are not legally binding. Maintenance Agreement - Agree to maintain these conditions.

Corporate or other Business Entity Organizations.

comfort letters, and maintenance agreements. Comfort letters are not legally enforceable, gives some support. Maintenance agreements are not as legally binding as a guarantee. Will agree to help if needed.

Personal Guarantees

company owners or officers. Small business with one owner. Guarantee has more value if there is another source of income, aside from owner and business.

contractual Guarantee

contingent support such as a standby letter of credit. Standby letter of credit: Will not give them the money now, but if they need it we will give it to them. Can fund up to a certain amount.

In which industry lifecycle stage would companies be most likely to focus on cost discipline? a. Introductory b. Growth c. Matured. d. Decline

decline

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

growth and mature

Standby Letter of Credit

in lieu of guarantee by financially responsible 3rd bank. Guarantees payments if specified events occur. Will fund a line of credit up to a certain amount. More common for smaller customers. For larger customers, relatively rare, indicates that they are unable to make payments.

Non-Financial

insurance

The Conference Board announced today that interest rates remain low. Reports indicate 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

late contraction

Provide _______ term money for long term needs. and _______ term money for short term needs.

long; short

What are the Bank's Goals?

make loans that are profitable. Gain a profit on interest. Bank makes loans that offer protection and profitability.

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

mature

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 forecast C.industry and economic reports D.organizational charts and job descriptions

organizational charts and job descriptions

What are the 3 objectives of a loan presentation packet?

outlines the reasons the financing is needed and what management expects to accomplish with the funds. Should project the future operations of the business to help evaluate the ability to repay the loan. Should exhibit management's talents and professional abilities.

What is the importance of loan covenants?

protect banks. identify key risk points. those that will be enforced (course of conduct). Provide timely warning signs. DO NOT repay loans but bring borrower back to the table. Indicate warning signs EX: Gross Profit Margin must be kept at _____. Declining margins are an indication of problems with cash flows. Items in covenants must be monitored.

As the credit analyst of Your Bank, you have been asked to assess the liquidity of Burgess Corporation, a distributor of office supplies. Which of the following measures would provide the most accurate measure of liquidity? a. Net working capital b. Quick ratio c. Current ratio d. Working capital/sales

quick ratio

3 typical assets pledged in support of C & I Loans are:

receivables, inventory, and fixed assets.

Matching the concept. Sources of Cash--> Business Drivers Tenor (ADR) LTV (Safety) Repayment Schedule Payment (Sound)

repayment schedule

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

revolving line of credit

a guarantee ___________ be the reason a loan is made. should should not

should not

Which of the following events would create a cash inflow in a direct cash flow statement? a) Sales growth with stable margins. b) Longer customer payment terms. c) Slower payment of trade creditors. d) Pay off existing bank debt.

slower payment of trade creditors

Primary is a ___________ source of repayment. Secondary is a ________ source of repayment.

sound, safe.

Negative Covenant

things you will not do. You will not pay a dividend unless cash balance is a certain % of total assets.

T or F The lender will have less information than the borrower due to information asymmetry.

true

Limited Guarantee

will be individual, one person is responsible for their share/portion.

A company with current-year sales of $4,500,000 and cost of goods sold 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 days. 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

($1,000)