Homework answers / question archive / Completing a Credit Application 1) Which of the following is NOT a component of a credit application? Security Comparable Company Analysis Environmental Comments Management Analysis 2-Which of the following is NOT a reason why the ownership structure of a company is important for the credit application? The tangible net worth of the company owners can be evaluated when considering the collateral of the company

Completing a Credit Application 1) Which of the following is NOT a component of a credit application? Security Comparable Company Analysis Environmental Comments Management Analysis 2-Which of the following is NOT a reason why the ownership structure of a company is important for the credit application? The tangible net worth of the company owners can be evaluated when considering the collateral of the company

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Completing a Credit Application

1) Which of the following is NOT a component of a credit application?

1. Security
2. Comparable Company Analysis
3. Environmental Comments
4. Management Analysis

2-Which of the following is NOT a reason why the ownership structure of a company is important for the credit application?

1. The tangible net worth of the company owners can be evaluated when considering the collateral of the company.
2. Depending on the ultimate beneficial owners, regulations may prevent us from lending to the company.
3. Ownership determines who is liable for the loans taken by the company.
4. It gives an idea of who the primary decision-makers are and the effectiveness of the decision-making process.

3-What does a proper loan structure accomplish for the borrower and the lender?

A-Maximizes available funds; charges the highest interest rate

B-Satisfies financial needs; optimizes profitability

C-Minimizes interest fees; speeds up the approval process

D-Solves working capital shortfalls; increases account monitoring efficiency

4-Which of the following statements is TRUE about reviewing a borrower’s history and background?

1. A borrower’s history with the financial institution should not be used for annual reviews as it may skew the credit evaluation with non-current information.
2. For existing borrowers, the most important part of the annual review process is to review changes that have occurred since the last review.
3. Extending a loan to a newer company is safer than an older company because the lender can place stricter covenants.
4. You should review what an existing borrower’s company offers every year to ensure they have not changed their primary market or value proposition.

5-.Which of the following is considered an external factor for the automotive industry?

 

Hint: Factors for industry analysis are based on how they affect the borrower's industry, not just the borrower.

 

A-Technological advancements are discovered, changing vehicle designs.

B-Manufacturing employees begin a protest and stop working.

C-Global economic experts predict an upcoming recession.

D-Stricter emission regulations are implemented for automobile manufacturers.

6- Which of the following is TRUE regarding management analysis?

1. Management analysis is critical when dealing with a high-risk borrower.
2. The reputation of the management team should be evaluated by interviewing employees of the company.
3. A risk averse management team is preferred when evaluating the creditworthiness of a company.
4. Management analysis is always necessary, even for low-risk borrowers.

7-What factors should you pay attention to when evaluating a company’s financial standing?

A-Growth, balance sheet health, cash flow and debt service coverage, debt structure

B-Cash flow and debt service coverage, profitability, credit rating, growth

C-Profitability, interest-bearing debt, solvency, capital structure

D-Profitability, operational performance, balance sheet health, cash flow, and debt service coverage

8-Which of the following statements is TRUE regarding loan security?

A-It is unnecessary to take security if the company has a good history with the financial institution.

B-Loan security protects the lender’s claim against unforeseen and unfavorable events.

C-An analyst should aim to secure a loan with one of each type of loan security.

D-Financial institutions should always approve loans if the value of the security can cover the value of the loan.

9-What is the purpose of loan covenants?

A-To make the monitoring process more efficient, as the lender can determine creditworthiness based on whether any covenants have been breached.

B-To allow the financial institution to affect the decision-making of the borrower.

C-To encourage the company to be run with financially sound best practices.

D-To require or restrict the borrower from doing something that could affect their creditworthiness.

10-What should NOT be included in the conclusion and recommendation section of the credit application?

A-The analyst’s comfort level with the loan structure and collateral.

B-The key strengths and weaknesses of the company and the transaction.

C-Why the analyst is comfortable with the risks of the transaction.

D-A short summary of the points discussed throughout the application

11-Stampede’s A/R turnaround days and payables turnaround days are higher and lower than the industry benchmarks respectively. Despite this, why is this not considered a warning signal against lending to the company?

A-Stampede’s credit application is over-secured so small warning signals like these ratios are ultimately insignificant to the application.

B-Stampede’s performance ratios are not far enough from industry benchmarks to be a concern.

C-Stampede operates at a large enough scale that we are assured that loan payments will be made, despite suboptimal performance ratios.

D-Stampede purposely extends favorable payment terms to one of their key customers as part of its business strategy.

12-Which of the following is a factor that should have been included or discussed in Stampede’s credit application?

A-Succession planning regarding the likely impending retirement of the CEO.

B-Detailed year-over-year financial information and ratios for each account.

C-Risks of company management being run entirely by the same family.

D-Comprehensive analysis of Stampede’s two main competitors.

13-Which of the following statements regarding environmental comments is FALSE?

A-Environmental due diligence should be conducted on companies whose operations create significant externalities around their properties.

B-The primary goal of an environmental assessment is to identify how spillovers from commercial operations may impact the value of the property.

C-If environmental risks are identified, the credit analyst should form recommendations for the credit application to mitigate risk.

D-Environmental assessments need to be conducted if commercial real estate is taken to secure a loan.

14-Stampede’s financial growth is slowing down. Despite this, their credit application for a $5 million fixed-term loan was still approved. What does this tell us about the credit analysis process?

A-When a company is over-secured like in Stampede’s case, it is acceptable to ignore findings from other sections of the credit application.

B-Growth is unimportant for the credit analysis process as long as the company expects to remain profitable going into the future.

C-Credit analysis evaluates the company holistically, looking at all factors that affect debt service, not just financial analysis.

D-The credit analysis process can sometimes miss details that would affect the credit decision. The approval recommendation for Stampede’s credit application was incorrect.