MCQ Quiz

1. 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.

2. What is the difference between operating cash flow and 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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

13. 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.

14. 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.

15. 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.

16. 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

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

a) Applicant.

b) Beneficiary.

c) Government.

d) Guarantor.

18. 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.

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 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.

21. 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

22. 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.

23. 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

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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 (50l-26l-14l)

d) INR 1,185,000

34. 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.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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.

47. 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

48. 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.

49. 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.

50. 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.

51. 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.

52. 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%

53. 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.

54. 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.

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

a) 1 and 2.

b) 1 and 4.

c) 2 and 3.

d) 3 and 4.

56. 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.

57. XYZ trucking company 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.

58. 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.

59. 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

60. 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.

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

a) Business.

b) Fundamental.

c) Market.

d) Operational.

62. 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.

63. 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

64. 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.

65. 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.

66. 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.

67. 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.

68. 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.

69. 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.

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

a) Assignment.

b) Hypothecation.

c) Lien.

d) Mortgage.

71. 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.

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

a) Hypothecation.

b) Lien.

c) Mortgage.

d) Pledge.

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

a) Applicant.

b) Bank.

c) Beneficiary.

d) Seller.

75. 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 returns requirements for the transaction.

76. 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.

77. What causes market overcapacity?

a) Industry growth.

b) Weak competition.

c) Drop in a sales price.

d) Low product demand.

78. 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.

79. 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.

80. 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.

81. What year-over-year change in gross margin represents positive financial risk?

a) No change represents stability. Gross margin does not affect risk.

b) A decrease represents profit growth.

c) An increase represents profit growth.

82. Which is a major risk for a business in the mature stage of its life cycle?

a) Failure to repay debt.

b) Filing for bankruptcy.

c) Merger with a competitor.

d) Inability to invest in new products.

83. Which company-related issue can result in a problem loan?

a) Deregulation.

b) Globalisation.

c) Illiquidity.

d) Seasonality.

84. Which figure is likely to increase for a business after a seasonal peak sales period?

a) Sales.

b) Inventory.

c) Trade payables.

d) Trade receivables.

85. What is a generally acceptable gearing ratio for a business in India?

a) 1.00

b) 2.00

c) 3.00

d) 4.00

86. Which is a long-term source of working capital financing?

a) Accrued expenses.

b) Customer advances.

c) Term loans.

d) Trade payables.

87. What does the trade receivables days ratio measure?

a) Actual time it takes to pay suppliers.

b) Average time it takes to pay suppliers.

c) Actual time it takes to collect cash from customers.

d) Average time it takes to collect cash from customers.

88. 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.

89. On what basis is the risk premium for a loan calculated?

a) Expected loss.

b) Loss given default.

c) Exposure at default.

d) Probability of default.

90. 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.

91. Which source of external information can help a relationship manager identify changes that might affect the outlook for a borrower’s industry?

a) Credit bureau reports.

b) Stock market announcements.

c) Reports of parties that have defaulted.

d) Government announcements of new or amended regulations.

92. What is a sign of incipient stress which may result in an account being classified as Special Mention Account (SMA) under the SMA-0 sub-category?

a) Delay of 30 days in submission of stock statements.

b) Decrease in frequency of overdrafts in current accounts.

c) Actual sales and operating profits falling short of projections accepted for loan sanction by 20%.

d) Return of three cheques issued by borrowers in 30 days on grounds of non-availability of balance.

93. Which is an appropriate source of capital investment financing?

a) Line of credit.

b) Letter of credit.

c) Government grant.

d) Working capital loan.

94. What is the best time to pay a creditor to optimise cash flow?

a) Immediately.

b) On the due date.

c) 30-60 days after the due date.

d) 60-90 days after the due date.

95. Which statement is correct regarding the effect of a debit or credit on the particular type of financial account?

a) A credit to an asset account increases it.

b) A debit to a liability account decreases it.

c) A debit to a revenue account increases it.

d) A credit to an equity account decreases it.

96. What is drawing power?

a) The approved fund-based working capital limit to finance a company’s inventory and receivables.

b) The value of eligible inventory and receivables detailed in a company’s latest stock statement that can be drawn against.

c) A company’s credit limit based on the value of eligible items from its latest stock statement multiplied by the agreed margin.

d) The lower of a company’s approved fund-based working capital limit and the lending value calculated based on its latest stock statement and usance letters of credit issued.

97. What is the order of quality of financial statements from lowest to highest?

a) Audited, reviewed, positive assurance, prepared.

b) Positive assurance, prepared, reviewed, audited.

c) Prepared, reviewed, audited, positive assurance.

d) Reviewed, positive assurance, prepared, audited.

98. What term refers to the amount that a lender expects to be outstanding at the time of default?

a) Expected default loss.

b) Exposure at default.

c) Loss given default.

d) Probability of default.

99. Which is a negative effect of sales fluctuations for seasonal businesses?

a) Falling sale prices.

b) Increased inventories.

c) Incapacity to compete.

d) Inability to repay loans.

100. What three categories are cash payments classified by in the statement of cash flows?

a) Direct, indirect and Uniform Credit Analysis.

b) Cash receipts, cash payments and capital expenditures.

c) Operating activities, investing activities and financing activities.

d) Operating activities, management activities and financing activities.

101. 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.

102. What information must be collected and analysed before a personal guarantee on a loan can be accepted?

a) Evidence that the guarantor has a higher net worth than the borrower.

b) Proof that the guarantor is employed showing the gross and net pay received.

c) Confirmation that the guarantor has no other outstanding guarantees.

d) The amount of the guarantor’s obligations to banks, including pending loan applications.

103. 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.

104. What activity would provide the least useful information when conducting an inspection?

a) Holding discussions with the borrower.

b) Assessing the borrower’s activity level.

c) Establishing the existence of borrower’s capital stock.

d) Updating the Bank’s existing knowledge about the borrower’s operations.

105. What are the three key reference points that form the foundation of most projections?

a) Start-up, expansion, and succession.

b) Inventory, sales growth, and rate of return.

c) Liquidity, profitability, and capital expenditures.

d) Past results, management plans, and economic environments.

106. What type of credit facility will typically have a lower interest rate?

a) Fund-based.

b) Non-fund-based.

c) Secured.

d) Unsecured.

107. What would allow a positive view to be taken of management’s ability to develop a robust and implementable business plan?

a) Plans are developed in a top-down manner.

b) There is a well-defined and balanced planning process.

c) Corrective actions are taken quickly where targets are not being met.

d) Plans are communicated to all relevant parties within the first month of the new financial year.

108. What can be reasonably assumed when a business’s debt to tangible worth ratio is higher than 1.00?

a) Gearing is low.

b) Financial risk is unfavourable.

c) Creditors support assets more than the owners.

d) The owners support assets more than creditors.

109. Which can occur as a result of including a group cross-default covenant in the credit agreement that involves a loan guarantor?

a) The guarantor is protected if the borrower defaults.

b) The borrower is protected if the guarantor defaults.

c) Allows action if the borrower and guarantor default.

d) Allows action against the borrower if the guarantor defaults.

110. Which is considered a financing activity when using the indirect method of structuring a cash flow statement?

a) Purchases of fixed assets.

b) Long-term loans and advances.

c) Proceeds from sale of fixed assets.

d) Proceeds from sale of share capital.

111. 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.

112. Which is the most effective type of covenant in a credit agreement?

a) Balance sheet.

b) Cash flow.

c) Event-based.

d) Non-financial.

113. Which existing market condition can act as a key barrier to entry for a business that wants to expand into a new market?

a) Slow market growth.

b) Product standardisation.

c) Expensive local manpower.

d) Well-established competitor.

114. 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.

115. Which Master Circular of the Reserve Bank of India aims to ensure that low-income individuals are able to benefit from the country’s economic growth?

a) Exposure Norms.

b) Statutory Restrictions.

c) Priority Sector Lending.

d) Prudential Norms on Income Recognition.

116. Which type of supplier is lowest risk with reference to customer concentration and the business’s position as a supplier?

a) Core supplier with low interdependency with the buyer.

b) Core supplier with high interdependency with the buyer.

c) Peripheral supplier with low interdependency with the buyer.

d) Peripheral supplier with high interdependency with the buyer.

117. Which risk driver refers to the average time it takes a business to collect its sales in cash?

a) Sales growth.

b) Gross margin.

c) Accounts payable days.

d) Accounts receivable days.

118. What are scorecards widely used to assess?

a) Changes in the price of credit default swaps.

b) Liquidity mismatches in institutional financing.

c) Default probability based regression analysis.

d) Credit applications for small business borrowers.

119. 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.

120. A company is facing financial difficulties and is in the process of corporate debt restructuring (CDR). What is one of the options a minority lender to this company has if the lender does not want to commit additional funding?

a) Demand repayment by stipulating a recompense clause.

b) Obtain approval from the CDR Core Group to be excluded from the process.

c) Arrange for its share of funding to be provided by another lender, either existing or new.

d) Agree to defer principal and interest payments for one year before the CDR package becomes effective.

121. 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%

122. In what type of letter of credit is payment delayed until a specified future date?

a) Contract.

b) Demand.

c) Sight.

d) Usance.

123. Which occurs immediately after a bank guarantee is invoked?

a) The bank makes payment.

b) The beneficiary discharges the guarantee.

c) The bank removes the guarantee from its books.

d) The beneficiary enters into a contract with the applicant.

124. What previous management action is likely to raise doubt about management integrity and whether to enter into a credit relationship with a business?

a) Tax planning.

b) Making tweaks to reported accounts to mask a declining financial performance.

c) Marginally increasing the dividend payout ratio compared to the previous financial year.

d) Making changes to the board of directors and audit committee to increase the proportion of independent directors.

125. What is the primary source of cash flow used in calculating debt repayment capacity?

a) Sale of an asset.

b) Peripheral rental fees.

c) Extraordinary income.

d) Cash generated from operations.

126. Which activity of a borrower is an example of siphoning funds?

a) Using short-term capital for long-term purposes.

b) Routing funds through a bank other than the lender bank.

c) Investing in other companies without the approval of lenders.

d) Using borrowed funds for purposes unrelated to the operations of the borrower.

127. What type of business organisation lodges its own tax returns and is responsible for its own taxes?

a) Company.

b) Partnership.

c) Sole trader.

d) Wholesaler.

128. What strategy can management adopt to minimise the impact of work stoppages?

a) Employ additional staff.

b) Obtain appropriate insurance.

c) Engage regularly with staff to ensure good labour relations.

d) Hold sufficient stocks so that orders can be fulfilled if production is lost during the stoppage.

129. 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

130. A note in the auditor's report for TGH Ltd. indicates that an asset reserve was credited INR 50,000, instead of expensed, as a result of creative accounting. What effect will this entry have on TGH Ltd.’s financial statements?

a) Profit will be overstated.

b) Liabilities will be overstated.

c) Liabilities will be understated.

d) Shareholder's equity will be understated.

131. Under what circumstances would a company typically seek external debt financing?

a) When it is cash rich.

b) When its structure allows for new equity investors.

c) When equity holders are willing to take on additional risk.

d) When existing owners are unwilling to dilute their ownership interest.

132. What is the typical loan-to-value ratio for companies with lower levels of financial risk or high levels of available equity finance?

a) 60%

b) 80%

c) 50%

d) 30%

133. 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.

134. Which type of equity shares can be repaid at the discretion of the issuer?

a) Common stock.

b) Convertible preference shares.

c) Cumulative preference shares.

d) Redeemable preference shares.

135. What aspect of a business must be considered when performing an industry and business risk assessment?

a) Its future cash flows.

b) Its vulnerability within the competitive marketplace.

c) Management’s capacity to run the business profitably.

d) Its ability to generate cash through its daily operations.

136. What is the main purpose of conducting a competitive analysis during the loan pricing decision process?

a) To calculate the lowest lending rate the bank is willing to apply to the loan.

b) To determine the probability of loss based on the competitor’s rate pricing.

c) To persuade the relevant committee to approve a lending rate lower than those of competitors.

d) To determine whether the lending rate should be adjusted based on the ceiling established by other lenders.

137. What part of the loan pricing process sets an interest rate floor, below which the loan is financially undesirable?

a) Cost analysis.

b) Loan structuring.

c) Loan accounting.

d) Competitive analysis.

138. 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.

139. 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.

140. At what stage in the management cycle should the management consider the effect of changes in the external environment on the company’s business goals?

a) Assessing business needs.

b) Developing plans to meet goals.

c) Aggregating and organising resources.

d) Adjusting plans, resources, and methodologies.

141. What factor plays a key role in influencing the industry due to a large bargaining power of a significant supplier?

a) Labour disruptions.

b) Liberal credit terms.

c) Decreased sales prices.

d) Improved service levels.

142. How might an inadequate management succession plan affect a business’s cash flow?

a) Training the new managers to address their skill gaps may result in excessive costs.

b) Cost of hiring for the positions vacated due to promotion of the new managers will impact the cash flow.

c) Weak relationship of the new managers with the bank staff may result in the credit facilities not being renewed.

d) Poor decisions of the new managers that lack sufficient skills or experience might result in weaker business performance.

143. Which best describes the effect that political decisions and frequent legislation changes in India have on its business and industry risk?

a) Banks absorb most of the impact and businesses are less affected as a result.

b) Taxation policies cause businesses to be less transparent in their financial reporting.

c) Opportunistic decisions that influence monetary policy can negatively affect a business’s financial performance.

d) Demonetisation of high denomination currency notes is an example of legislation that negatively affects small businesses working with cash.

144. 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.

145. How can a company’s management best minimise the impact of potential interruptions in the input supplies?

a) Obtain supplier insurance.

b) Hold large stocks for all key supply inputs.

c) Maintain good personal rapport with the key input suppliers.

d) Ensure that there is an alternate supply source for all key inputs.

146. Which state of the economy has a neutral impact on credit risk?

a) Contraction.

b) Recovery.

c) Growth.

d) Stability.

147. 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.

148. Which lists the primary components of India’s corporate debt restructuring (CDR) system?

a) Debtor-creditor agreements, inter-creditor agreements.

b) CDR Standing Forum, CDR Empowered Group, CDR Cell.

c) Multiple banking accounts, syndications, consortium accounts.

d) Repayment period, repayable amount, instalment amount, interest rate.

149. What is the benefit of setting meaningful forecast assumptions in the overall projection process?

a) To confirm future loan payments will be achievable.

b) Assumptions depend on the results of the projections.

c) To reflect factors independent of management’s past performance.

d) To enable a realistic assessment of the projected financial performance that a credit decision is substantially based on.

150. 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.

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

a) Assignment.

b) Hypothecation.

c) Lien.

d) Mortgage.

152. An increase in which item will increase a borrower’s debt service coverage ratio?

a) Loan interest.

b) Loan collateral.

c) Cash flow from operations.

d) Scheduled principal repayment.

153. Which is an example of a liquidity early warning signal?

a) Rising corporate bond prices.

b) Non-consolidation of subsidiaries’ accounts.

c) Frequent overdrafts that are covered in a few days.

d) A large cheque that is returned for insufficient funds.

154. When allowing a customer to draw under a domestic bill discounting facility, why is it important to confirm that there is an underlying movement of goods?

a) To ensure that the transaction is not a one-off.

b) To avoid providing financing for intergroup transactions.

c) To reduce the possibility of providing accommodation finance.

d) To ensure that financing is provided only for goods that have been shipped to existing customers.

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

a) Design.

b) Drawdown.

c) Monitoring.

d) Negotiation.

156. In what type of feasibility assessment is a project’s maximum debt to equity ratio reviewed?

a) Cost of project.

b) Economic viability.

c) Means of finance.

d) Technical viability.

157. What is a characteristic of a good business plan?

a) Setting measurable goals.

b) Setting business objectives.

c) Being reactive to changing demand.

d) Defining who is accountable to the plan.

158. Which source of external information about a company’s past behaviour can be used to assess its management integrity?

a) Discussions with management.

b) Details of dividends paid over the last five years.

c) Opinion about management included in credit agency reports.

d) Account statements showing whether the company has met its obligations to the bank on time.

159. What causes market overcapacity?

a) Industry growth.

b) Weak competition.

c) Drop in a sales price.

d) Low product demand.

160. What type of risk is the risk that credit exposure is not adequately structured?

a) Facility risk.

b) Financial risk.

c) Industry risk.

d) Management risk.