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Account Monitoring and Warning Signs 1) When conducting an annual credit review, which components of the financial statement review are typically looked at? Select all that apply

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Account Monitoring and Warning Signs

1) When conducting an annual credit review, which components of the financial statement review are typically looked at? Select all that apply.

1. Comparative analysis
2. Working capital analysis
3. Decision making abilities
4. Internal management analysis

2-Which is not a typical component looked at in an annual credit review?

1. Management review
2. Business review
3. Competitor review
4. Security review

3- Match the following warning signs to the methods of assessing them.

1. Decreasing sales volume
2. Increased leverage/gearing
3. Decreased liquidity
4. Declining profitability

1. Look for changes in the current ratio or quick ratio.
2. Look for sales volumes after adjusting for inflation.
3. Look for changes in operating profits and profit margins.
4. Look for increases in debt funding.

A to 2

B to 4

C to 1

D to 3

4-Jim is looking to increase his line of credit limit because he accidentally purchased too much inventory for his business. What are some implications or indications of this request? Select all that apply.

1. Change in customer preferences
2. Business growth
3. Poor planning
4. A problem with cash flow

5-What are some principle causes of corporate decline? Select all that apply.

1. The company paying off debt
2. Competition
3. Company events
4. Poor management

6-What is not an example of an inadequate financial control?

1. Inappropriate cost and overhead allocations
2. Poorly used management reporting systems
3. Absence of cash flow forecasts, costing systems and budgetary control
4. Limits on how much management can spend on discretionary purchases

7- What are the four characteristics of best practice early warning signals used to monitor corporate clients?

1. Monitorable, trigger action, measurable, employee specific
2. Employee specific, measurable, monitorable, communication
3. Client specific, measurable, monitorable, trigger action
4. Client specific, monitorable, trigger action, time sensitive

8-What is not a characteristic of the Altman’s Z-score model?

1. It assesses the cash flow of the company
2. It uses financial ratios
3. It measures divergence
4. It can be applied to all types of business

9- In Altman’s Z-score Model, what does X1 refer to?

1. Working Capital / Total Assets
2. Sales / Total Assets
3. Retained Earnings / Total Assets
4. EBIT / Total Assets

10-Calculate the Z-score (original version) using the following information:

Working capital = 150

Retained earnings = 20

EBIT = 40

Sales = 350

Total Assets = 1000

X4 = 1.2

 

1. 1.40965
2. 2.20965
3. 1.84062
4. 1.38012

 

11-What bond rating can we expect for a company with a Z-score (original version) of 2.450 to have?

1. BBB
2. B
3. A
4. BB

12-Can default risk be estimated using principles of option theory?

1. No
2. Yes

13- Which is not one of the three stages used to calculate expected default frequency (EDF)?

1. The expected value of the firm (based on current firm value and volatility)
2. The default point-based on the firm’s liabilities
3. Calculate the market value and volatility of the firm’s shares
4. Calculate the growth of competitors

14- What is the formula used to determine the most frequent default point?

1. Value of firm = current liabilities + (0.5 x long-term liabilities)
2. Default rate = current liabilities + (0.5 x current liabilities)
3. Default chance = non-current liabilities + (0.5 x long-term liabilities)
4. Value of firm = non-current liabilities + (0.5 x current liabilities