MCQ Quiz

1. Why is management integrity the most critical factor when assessing the impact of management risk on a company’s credit risk?

a) Management lacking integrity may prioritise payments to other external stakeholders.

b) A lack of integrity can result in a company using cash flows for purposes other than interest or loan payments.

c) A lack of integrity can result in a company’s underperformance and subsequent inability to meet its payment obligations.

d) A positive assessment of management integrity is necessary for a lender to be confident in the reliability of the information provided by the company.

2. Which financial trigger can be set up internally as an early signal of a borrower’s probability of default?

a) Change in profit projections.

b) Change in ownership structure.

c) Unexpected change in dividend policy.

d) Emergence of new competitive entrants in the market.

3. In an initial review of a company’s financial statements, which ratios can be reviewed to uncover opportunities and identify potential risk flags?

a) Net income and gross margin.

b) Net income and return on equity.

c) Gross margin and inventory days.

d) Inventory days and return on equity.

4. Which action by a borrower’s management could have an adverse effect on its cash flow and ability to meet its obligations?

a) Adopting a conservative financing strategy.

b) Executing plans to ensure short-term goals are met.

c) Increasing the rate of depreciation resulting in reduced net income.

d) Disclosing information to other stakeholders on a need-to-know basis.

5. What is the impact of low market entry barriers on competition within an industry and the financial performance of businesses’ operating within the industry?

a) Increased competition, increased cash flow.

b) Increased competition, decreased cash flow.

c) Decreased competition, decreased cash flow.

d) Decreased competition, increased cash flow.

6. Which activity can reduce a company’s cash flow position?

a) Sale of assets.

b) Collection of receivables.

c) Purchase of investments.

d) Increase in owner’s equity.

7. What type of credit rating will most likely cause a borrower’s credit score to be adjusted downward because of an expected downturn in the borrower’s industry?

a) Fail grade rating.

b) Single risk rating.

c) Facility risk rating.

d) External international rating.

8. Which type of structural mitigation is used to ensure that all intercompany transactions occur at arm’s length?

a) Collateral.

b) Guarantee.

c) Monitoring.

d) Restrictive covenant.

9. At the beginning of the year, ZXV Inc. acquires computer equipment at a cost of INR 500,000. Using a 40% declining balance depreciation rate each year, what is the depreciation charge for this equipment in the second year?

a) INR 120,000

b) INR 180,000

c) INR 200,000

d) INR 300,000

10. What test is used to determine whether a borrower will generate enough cash flow from day-to-day operations to cover its debt obligations?

a) Bias to fail test.

b) Liquidity test.

c) Secondary source test.

d) Solvency test.

11. What is meant by the term “excess borrowings” under the Tandon Committee approach to lending?

a) The amount borrowed exceeds current liabilities.

b) The liquidity level exceeds the minimum required.

c) The maximum permissible bank borrowings exceed current assets.

d) The minimum required net working capital exceeds the actual amount.

12. How many days is the short-term financing gap for a company with 47 trade receivables days, 68 inventory days, and 63 trade payables days?

a) 42

b) 52

c) 84

d) 178

13. Based on these information: current secured INR 35,000 and current unsecured INR 20,000; non-current secured INR 75,000 and non-current unsecured INR 60,000, what is this company’s total amount of subordinated debt outstanding?

a) INR 55,000

b) INR 80,000

c) INR 110,000

d) INR 135,000

14. What information in a credit agency report can help a bank assess a company’s management integrity?

a) Opinion about the company management.

b) Information about the financial performance.

c) How freely the management shares information.

d) Details on covenant compliance for the bank loans.

15. Which factor can be excluded from the cost analysis during the pricing decision process?

a) External financial market conditions.

b) The borrower’s total business with the bank.

c) The borrower’s past and current financial performance.

d) The bank’s minimum return requirements for the transaction.

16. At what point during an asset purchase do a company’s capital expenditures most affect its operational cash flow?

a) Before the purchase while saving for the down payment.

b) At the time of purchase and beyond due to financing costs.

c) When the asset purchased generates expenses such as taxes and insurance.

d) Capital expenditures do not affect cash flow as they are outside normal operational activities.

17. What would describe a non-fund-based facility?

a) A facility that is lower risk than a fund-based facility.

b) A credit facility that incurs a monetary obligation when draw down occurs.

c) A facility that is similar to a fund-based facility in terms of how it is recorded in a bank’s books.

d) A facility that may result in a funded obligation if the customer fails to settle any payments due.

18. What does the credit risk premium attributed to in the credit pricing process?

a) The bank’s risk appetite.

b) Expected return on equity.

c) The bank’s growth strategy.

d) Losses incurred due to default.

19. During which implementation phase of deal structure is counsel instructed on documentation and covenant definition issues?

a) Design.

b) Drawdown.

c) Monitoring.

d) Negotiation.

20. Which risk driver is most sensitive to economic factors such as a recession?

a) Capital expenditures.

b) Sales growth figures.

c) Trade receivable days.

d) Operating profit margin.

21. What is the primary reason for assessing a business’s financial performance before extending credit?

a) To determine what a company’s key ratios are.

b) To determine how a business generates cash flow.

c) To determine how a company spends its free cash flow.

d) To determine why a business has achieved certain results.

22. What type of non-fund-based lending facility would a buyer of goods and services use to guarantee a one-time payment?

a) Export credit.

b) Letter of credit.

c) Overdraft.

d) Term loan.

23. What is the starting point in the process of projecting a business’s financial performance?

a) Evaluate economic factors.

b) Complete sensitivity analysis.

c) Project future values for the risk drivers.

d) Review historic levels of the risk drivers.

24. Titan Ltd. is a lumber exporter with annual sales of INR 750,000, 45 inventory days, 35 trade receivables days, and 40 trade payables days. What approximate amount of external financing will Titan Ltd. need to support its operating cycle?

a) INR 61,644

b) INR 82,192

c) INR 102,740

d) INR 246,575

25. What information should be reviewed in the periodic progress reports on implementation of a project to assess likelihood of meeting the loan repayment obligations?

a) The project implementation is on schedule.

b) Funding is available to cover any cost overruns.

c) There are orders for the project outputs once completed.

d) Project reports have been approved by the lender’s engineer.

26. Which describes the absolute priority rule with respect to payments made to creditors at default?

a) Subordinated debt is paid before insolvency-related costs.

b) Available funds are paid first to the lowest ranked class until the borrower’s obligations are fully satisfied.

c) Available funds are paid first to the highest ranked class until the borrower’s obligations are fully satisfied.

d) Distributions to each ranked class are paid out proportionately based on its percentage in the company's capital structure.

27. What is the difference between a partnership firm and a Limited Liability Partnership (LLP)?

a) If a partner dies a partnership firm continues to exist and an LLP dissolves.

b) An LLP is a separate legal entity from its members and a partnership is not a separate legal entity.

c) An LLP is governed by the Indian Partnership Act and a partnership firm is governed by the Companies Act.

d) The income from a partnership firm stays within the firm and LLP income is personal income for the partners.

28. What is the first step for a management team in order to achieve results through the efforts of others?

a) Set the strategic direction.

b) Source the necessary resources.

c) Incentivise the organisation in an effective manner.

d) Manage the critical business operations on a daily and long-term basis.

29. Why must a company’s management plan for unexpected events even if they are unlikely to occur?

a) Robust planning can reduce costs as an alternative to obtaining insurance coverage.

b) Contingency planning is a prerequisite to obtain insurance coverage and business loans.

c) Many improbable unexpected events can have a significant effect on the business operations.

d) Adequate planning can help minimise the impact of disturbances relating to economic cycles and technological changes.

30. Which organisational structure can inhibit management’s ability to take decisions thus adversely affecting the company’s performance and credit risk?

a) A pyramidal structure.

b) A centralised decision-making process.

c) A structure that has distinct divisions between different functions.

d) A structure in which roles and responsibilities are clearly documented.

31. Which element in the development of a business plan would indicate a high degree of management risk?

a) Set business objectives are easy to meet.

b) Reports on progress implementation are often late.

c) No consultation with stakeholders in setting up the plan.

d) Finalisation of the business plan only a few days before the start date.

32. How should a customer’s account activity be monitored to ensure end-use of funds?

a) Review a percentage of all the transactions.

b) Scrutinise all the transactions regardless of value.

c) Review the transactions above a threshold amount.

d) Browse through the account and investigate any unusual transaction.

33. In which scenario would customer concentration cause significant cash flow risk for a business?

a) The business sells clothing to individual consumers.

b) The business distributes flour to most bakeries in the region.

c) The business supplies specialised parts to the largest auto maker.

d) The business provides cleaning services to schools, offices, and residential buildings.

34. Which action might a company take when it is in the cash concern stage of financial distress?

a) Selling vital assets.

b) Cancelling bonuses.

c) Laying off key employees.

d) Eliminating management positions.

35. Under what circumstances might weak succession planning affect a borrower’s credit risk when a key management member leaves unexpectedly?

a) The nominated successor lacks management integrity.

b) The nominated successor has not completed all required training.

c) The nominated successor cannot take up the position for a few weeks.

d) Details of the nominated successor were not provided to the borrower’s bank.

36. Which is likely to be false of a company with a low gearing ratio?

a) It has a high debt load.

b) It has high interest costs.

c) It has high repayment ability.

d) It has a high repayment obligation.

37. How are surrounding businesses affected when an environment is dominated by two large employers?

a) Neutral on sales and profitability.

b) Loss of one of the employers creates high overall risk.

c) Increased employment reduces the risk for the industry.

d) The impact is significant only if a catastrophic market downturn occurs.

38. In what type of security charge are goods and raw materials commonly pledged as assets?

a) Assignment.

b) Hypothecation.

c) Lien.

d) Mortgage.

39. Why does a special purpose vehicle expose a lender to more risk than conventional financing?

a) The loan has no security guaranteed.

b) The sponsor has no established track record.

c) The sponsor is the only party liable for the loan.

d) The loan is repaid only from the project’s cash flows.

40. What external factors outside of a business’s control can affect its liquidity levels?

a) Credit and lending policy.

b) Facility and loan structure.

c) Industry and business risk.

d) Management and key persons’ risk.

41. Which item is evaluated more substantively when determining the amount of financing available to a company under the assessed bank finance method as compared to the maximum permissible bank finance method?

a) Assets.

b) Current ratio.

c) Liquidity.

d) Trade payables.

42. What is the primary purpose of calculating drawing power in a funds-based working capital facility?

a) To determine the amount the customer can draw on.

b) To ensure that bank funds are not tied up in obsolete stocks.

c) To ensure that drawings are being used to fund current assets.

d) To check that the value of eligible assets is at least equal to the approved credit limit.

43. A company that records the market value of its equipment on its balance sheet has not followed which accounting principle?

a) Cost.

b) Matching.

c) Conservatism.

d) Going concern.

44. What projected information is best to use to assess working capital limits?

a) Sales.

b) Balance sheet.

c) Labour expenses.

d) Profit and loss statement.

45. Which is the best description of the gearing ratio?

a) An indication of current assets to current liabilities.

b) An indication of net worth compared to total assets.

c) An indication of how much cash is available to cover payments.

d) An indication of how a business’s assets are funded between owners and creditors.

46. What is the number of inventory days for a company with sales of INR 500,000, inventory of INR 60,000, cost of goods sold of INR 300,000 and trade receivables of INR 125,000?

a) 73

b) 152

c) 175

d) 219

47. What is the difference between operating cash flow and earnings before interest, taxes, depreciation, and amortisation (EBITDA)?

a) EBITDA considers interest expense.

b) EBITDA considers capital expenditures.

c) EBITDA considers changes in cash flow.

d) EBITDA adds back depreciation and amortisation.

48. What is the profit before tax and financial costs for a company with sales of INR 5,000,000, cost of goods sold of INR 2,600,000, operating expenses of INR 1,400,000, interest expense of INR 60,000 and tax expenses of INR 125,000?

a) INR 815,000

b) INR 940,000

c) INR 1,000,000

d) INR 1,185,000

49. For how many days can an account remain continuously in excess of the sanctioned limit before it is considered out of order?

a) 30

b) 60

c) 90

d) 120

50. What is the primary reason for reviewing external information when assessing a company’s credit quality?

a) To evaluate any adverse press coverage of the company.

b) To assess the company’s vulnerability to natural disasters.

c) To review any gradual economic changes that may affect the company’s industry.

d) To evaluate what developments may create opportunities for the company or adversely affect its performance.

51. For which type of banking products does the Reserve Bank of India regulate interest rates?

a) Savings accounts.

b) Chequing accounts held by residents.

c) Personal loans of more than INR 200,000.

d) Commercial loans of more than INR 200,000.

52. What does a current ratio of 1.33 indicate about a company’s current assets?

a) Current assets are less than net working capital.

b) Current assets are able to cover double the current liabilities.

c) Very few current assets have been funded from current liabilities.

d) A portion of current assets has been funded from long-term sources.

53. Which party issues a letter of credit in a goods and services transaction?

a) Applicant.

b) Bank.

c) Beneficiary.

d) Seller.

54. What is the first step in the process of restructuring a loan?

a) Take control.

b) Develop an action plan.

c) Resolve future financing.

d) Implement the action plan.

55. What is the basic function of credit monitoring?

a) To ensure the borrower continues to be a good credit risk.

b) To ensure the borrower is operating within the credit limits.

c) To determine if the credit facilities are being used for the intended purpose.

d) To determine what actions should be taken where there is a cause for concern.

56. Companies operating in which industry are most likely to have a high investment in fixed infrastructure assets, with little inventory?

a) Electric utility.

b) Food retailing.

c) Home construction.

d) Financial services consulting.

57. Which result of an increase in management risk will most negatively affect a company’s financial performance?

a) Managers’ increased focus on their own compensation packages.

b) Managers fail to take timely or correct decisions that affect sales or costs.

c) Managers fail to take full advantage of favourable developments in the external environment.

d) Managers are less transparent in their dealings with external stakeholders, such as banks.

58. What is the most effective measure of a business’s operating efficiency?

a) Increase in sales.

b) Increase in profits.

c) Absolute level of operating expenses.

d) Trends in operating expenses as a percentage of sales.

59. What is considered as one of the three levels of oversight in the corporate governance process?

a) The media.

b) The regulators.

c) The board of directors.

d) Banks and other lenders.

60. In which condition can a local business perform well while the local economy is in recession?

a) Local competition is weak.

b) The business has a high profit margin.

c) The business sells high quality and durable products.

d) The local economy of business’s customers is thriving.

61. Which party enforces a bank guarantee in the event of default?

a) Applicant.

b) Beneficiary.

c) Government.

d) Guarantor.

62. Special Mention Accounts were introduced as a new asset category between which two categories?

a) Doubtful and Loss.

b) Standard and Doubtful.

c) Sub-standard and Doubtful.

d) Standard and Sub-standard.

63. Which proposition is least likely to be considered for a term loan for its financing requirements?

a) Expansion of a fleet of vehicles.

b) Capital expenditure for a power plant.

c) An instalment financing construction project.

d) Daily working capital requirements for a small business.

64. Which factor will most likely reduce loss given default?

a) Amount of the loan.

b) Duration of the loan.

c) Industry of the borrower.

d) Seniority of the loan.

65. What type of capital investment is intangible and financial in nature?

a) Applying for patents.

b) Developing new products.

c) Listing securities on a stock exchange.

d) Replacing existing plant and equipment.

66. What causes market overcapacity?

a) Industry growth.

b) Weak competition.

c) Drop in a sales price.

d) Low product demand.

67. If net sales for a company over three Fiscal Year Ends (FYE) was FYE 1: INR 1,25,00,885, FYE 2: INR 1,37,45,473, and FYE 3: INR 1,40,25,992, what is this company’s sales growth for FYE 3 compared to FYE 2?

a) 2.0%

b) 2.04%

c) 8.87%

d) 10.0%

68. Which factor will decrease a buyer’s market risk in the long term in conditions where the supplier has high bargaining power?

a) Buyer’s ability to pay.

b) Increase in supplier’s market share.

c) Availability of substitute products in the market.

d) High demand skilled workers are employed by the supplier.

69. Which is an example of an insurance covenant in a credit agreement?

a) Prohibition on providing other creditors security over any assets.

b) Restriction on incurring new debt above a pre-determined amount.

c) Requirement to pay premiums on schedule to avoid a lapse of coverage.

d) Obligation to submit security valuations performed by an independent appraiser.

70. Which costs related to environmental hazards can have a significant negative impact on a company’s credit risk?

a) Cost of insurance premiums.

b) Cost of hazardous waste clean-up.

c) Cost of compliance with environmental laws.

d) Cost of professional assessment of facilities for safety.

71. A company has INR 11,304,950 in Cost of Goods Sold (COGS) and INR 1,091,070 in trade payables as of its most recent fiscal year-end. The company claimed no depreciation in COGS. How many days on average did it take this company to pay its trade creditors during the fiscal year?

a) 9

b) 10

c) 35

d) 38

72. What type of credit rating is most appropriate to evaluate the credit risk of a group of borrowers that has never borrowed money before?

a) Corporate family rating.

b) Issue rating.

c) Issuer rating.

d) Short-term rating.

73. How does industry risk affect the credit risk of a particular business enterprise that operates within that industry?

a) The effect is limited to industry-specific regulations.

b) The effect is substantial only if the industry is in a decline phase.

c) The effect is insignificant as long as the particular business performs well and generates enough cash.

d) The effect is significant as industry risk includes factors that determine capital requirements and cash flow.

74. Which factor will most likely affect the length of time it takes to convert inventory to sales?

a) New products.

b) Increased financing.

c) Management decisions.

d) Accounts payable growth.

75. What type of early warning signals may be indicated as a result of technology changes?

a) Business.

b) Fundamental.

c) Market.

d) Operational.

76. What governing body for the Insolvency and Bankruptcy Code would set up accreditation for insolvency professionals and information utilities?

a) Adjudicating Authority.

b) Debt Recovery Tribunal.

c) Insolvency Professional Agency.

d) Insolvency and Bankruptcy Board of India.

77. What general inference can be made about a company that has positive cash flow from operations, and that is borrowing and investing?

a) It is starting up.

b) It is closing down.

c) It is restructuring.

d) It is acquiring other companies.

78. XYZ trucking company (XYZ) has recently entered into an arrangement with an online sales business to deliver their general consumer goods and expect that this partnership will improve their sales. XYZ has sought enhanced financing to support this new business. The transportation industry is in a decline due to a recession, and XYZ’s most recent annual financial statement shows relatively weak sales performance. What is the next step in assessing XYZ’s credit application?

a) The assessment should end, and credit should be declined.

b) The assessment should be postponed until the industry enters the recovery stage.

c) The assessment should continue and focus on total profit as a measure of success.

d) The assessment should continue with more focus on the sales projections scenarios and cash flow impact.

79. Which industry factor increases the need for a company to compete for a high volume of sales to remain profitable?

a) High fixed costs.

b) Few competitors.

c) High switching costs.

d) Rapid demand growth.

80. Which type of charge is appropriate when the security is a factory?

a) Hypothecation.

b) Lien.

c) Mortgage.

d) Pledge.