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Multiple Choice Quiz
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1
In a bank's credit analysis of a business loan application, typical uses of financial ratios would include:
A)a cross-sectional analysis of ratios, with other firms.
B)a time series analysis of ratios, with the applicant's historical ratios.
C)a ratio analysis conducted by Federal banking authorities.
D)All of the above
E)(a) and (b)
2
When a lending institution is trying to assess whether a borrowing firm's management is trustworthy, it is focusing on which of the "Five Cs"?
A)Character
B)Capacity
C)Capital
D)Collateral
E)Conditions
3
A "common size" analysis implies:
A)comparing firms having the same asset size.
B)comparing firms having the same stockholders' equity
C)expressing income statement items as a percentage of sales.
D)expressing balance sheet items as a percentage of total assets.
E)(c) and (d)
4
Which of the following would be viewed as "liquidity ratio"?
A)current assets/current liabilities
B)debt/net worth
C)debt/total assets
D)sales/total assets
E)b and c
5
"EBIT" is a/an:
A)balance sheet item, found among the assets.
B)income statement item, relating to earnings.
C)balance sheet item, found among the liabilities.
D)income statement item, found among the operating expenses.
E)balance sheet item, found among the stockholders' equity items.
6
A bond with a high degree of credit risk would:
A)be more liquid
B)be a junk bond
C)be priced to give a lower yield
D)be selling for a higher price
E)c and d
7
One particular approach to credit risk modeling is based on the idea that a borrowing firm holds a valuable default or repayment option. This is:
A)the RAROC model
B)Altman's Z-score model
C)the "common size" model
D)the KMV model
E)the ratio model
8

Consider the following data, for a given firm:

Total assets

$100 million

Current assets

    40 million

Current liabilities

    35 million

Long-term debt (book)

    50 million

Total stockholders' equity (book)

    15 million

Retained earnings

    10 million

Sales

  150 million

EBIT

      8 million

Market value of equity

    30 million

Compute Altman's Z-score for this firm.
A)0.82
B)2.32
C)4.20
D)3.73
E)2.09
9
Of the following Z-scores, which would suggest the highest probability of bankruptcy?
A).70
B)1.80
C)3.00
D)3.60
E)4.20
10

Consider the following financial statement data submitted in conjunction with a loan request.

Current assets

$1.2 billion

Current liabilities

  1.5 billion

Total assets

  3.8 billion

Total liabilities

  2.2 billion

Sales

  4.2 billion

Cost of goods sold

  1.9 billion

Net income

  0.85 billion

What is the firm's "gross profit"?
A)$2.3 billion
B)$1.6 billion
C)$0.85 billion
D)$3.8 billion
E)$6.1 billion
11

Consider the following financial statement data submitted in conjunction with a loan request.

Current assets

$1.2 billion

Current liabilities

  1.5 billion

Total assets

  3.8 billion

Total liabilities

  2.2 billion

Sales

  4.2 billion

Cost of goods sold

  1.9 billion

Net income

  0.85 billion

Compute the firm's "gross margin."
A)0.202
B)0.250
C)0.548
D)0.452
E)0.676
12

Consider the following financial statement data submitted in conjunction with a loan request.

Current assets

$1.2 billion

Current liabilities

  1.5 billion

Total assets

  3.8 billion

Total liabilities

  2.2 billion

Sales

  4.2 billion

Cost of goods sold

  1.9 billion

Net income

  0.85 billion

Compute the firm's "return on equity."
A)-0.188
B)0.224
C)0.531
D)0.202
E)0.654
13

Consider the following financial statement data submitted in conjunction with a loan request.

Current assets

$1.2 billion

Current liabilities

  1.5 billion

Total assets

  3.8 billion

Total liabilities

  2.2 billion

Sales

  4.2 billion

Cost of goods sold

  1.9 billion

Net income

  0.85 billion

Compute the firm's "debt to asset" ratio.
A)0.367
B)0.536
C)0.224
D)1.467
E)0.579
14
Information in the text suggests that in the early 2000s, _______________ provided superior warning signs about the deteriorating financial condition at Worldcom, when compared to the S&P ratings.
A)the total debt/net worth ratio
B)Fitch Investors
C)the gross profit margin
D)the KMV model
E)the current ratio
15
Some borrowers may be required by their lenders to hold a/an _________________, which is a percentage of the loan amount that must be kept on account at the lending institution.
A)reserve requirement
B)net worth requirement
C)compensating balance
D)collateral account
E)letter of credit
16
One model, pioneered by Bankers Trust, computes a loan's rate of return by dividing expected one-year loan income by the loan's value at risk. This approach is the:
A)KMV model
B)required reserve model
C)compensating balance model
D)Altman's Z-score model
E)RAROC model
17
When a bank's credit analysis focuses on the assets offered by the loan applicant as security for a loan, which of the "Five Cs" is being assessed?
A)Character
B)Capacity
C)Capital
D)Collateral
E)Conditions
18
Jane is applying for a mortgage loan. The monthly payment on the proposed loan will be $784. Annual property taxes for the property are $3,340. Jane's gross monthly income is $5,250. What is the "gross debt service" ratio?
A)78.6%
B)14.9%
C)20.2%
D)5.3%
E)21.4%







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