Financial Quiz

In an initial review of a company’s financial statements, which ratios can be reviewed to uncover opportunities and identify potential risk flags? 1. Net income. 2. Gross margin. 3. Inventory days. 4. Return on equity.

How does industry risk affect the credit risk of a particular business enterprise that operates within that industry?

Companies operating in which industry are most likely to have a high investment in fixed infrastructure assets, with little inventory?

• Electric utility.

• Food retailing.

• Home construction.

• Financial services consulting.

What is the difference between operating cash flow and earnings before interest, taxes, depreciation and amortisation (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.

What is the first step for a management team in order to achieve results through the efforts of others?

• Set the strategic direction.

• Source the necessary resources.

• Incentivise the organisation in an effective manner.

• Manage the critical business operations on a daily and long-term basis.

Which costs related to environmental hazards can have a significant negative impact on a company’s credit risk?

• Cost of insurance premiums.

• Cost of hazardous waste clean-up.

• Cost of compliance with environmental laws.

• Cost of professional assessment of facilities for safety.

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.

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.

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.

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.