CBP Financial Analysis and Credit Management 2 — Questions and Answers
Question 1: A company has a current ratio of 0.8. What does this indicate?
- The company has more current liabilities than current assets (Correct answer)
- The company is highly profitable
- The company has strong liquidity
- The company's debt-to-equity ratio is below 1
Correct answer: The company has more current liabilities than current assets
A current ratio below 1.0 means current liabilities exceed current assets, indicating potential short-term liquidity problems.
Question 2: Which credit analysis technique involves projecting a borrower's future cash flows to assess repayment ability?
- Trend analysis
- Pro forma analysis (Correct answer)
- Horizontal analysis
- Dupont analysis
Correct answer: Pro forma analysis
Pro forma analysis uses projected financial statements to estimate future cash flows and evaluate a borrower's ability to service debt.
Question 3: In commercial lending, what does EBITDA primarily measure?
- Net profit after all deductions
- Operating cash flow before non-cash and financing charges (Correct answer)
- Total asset turnover efficiency
- Book value of equity
Correct answer: Operating cash flow before non-cash and financing charges
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) approximates operating cash flow by excluding non-cash and financing-related charges.
Question 4: A loan covenant requiring a borrower to maintain a minimum debt service coverage ratio (DSCR) of 1.25x is an example of what?
- A negative pledge clause
- An affirmative financial covenant (Correct answer)
- A cross-default provision
- A subordination agreement
Correct answer: An affirmative financial covenant
An affirmative financial covenant requires the borrower to maintain specific financial metrics, such as a minimum DSCR, throughout the loan term.
Question 5: Which of the following best describes the 'quick ratio'?
- (Current Assets - Inventory) / Current Liabilities (Correct answer)
- Current Assets / Current Liabilities
- Cash / Total Liabilities
- Net Income / Total Assets
Correct answer: (Current Assets - Inventory) / Current Liabilities
The quick ratio excludes inventory from current assets because inventory is less liquid, providing a stricter measure of short-term liquidity.
Question 6: When analyzing a borrower's credit risk, 'concentration risk' refers to:
- Excessive exposure to a single borrower, industry, or geography (Correct answer)
- The risk that interest rates will rise during the loan term
- The probability of default on a specific loan
- The risk of currency fluctuation in international loans
Correct answer: Excessive exposure to a single borrower, industry, or geography
Concentration risk arises when a lender has disproportionate exposure to one borrower, sector, or region, increasing vulnerability to correlated losses.
Question 7: Which financial statement is most useful for evaluating a company's ability to repay a term loan?
- Balance sheet
- Income statement
- Statement of cash flows (Correct answer)
- Statement of changes in equity
Correct answer: Statement of cash flows
The statement of cash flows shows actual cash generated from operations, which is the primary source of loan repayment, making it the most critical document for credit analysis.
CBP Financial Analysis and Credit Management 2
A company has a current ratio of 0.8.
What does this indicate?