Question 1

Lloyd Blenman is building a shopping center in Charlotte and needs to get a loan until the shopping center is constructed and he can get a mortgage on the property.What type of loan does he need?

Accepted Answer

Interim construction financing is a type of short-term loan that is used to fund the construction of a property until a permanent mortgage on the property can be obtained. This type of loan is designed specifically for builders and developers who need funding to cover the costs of construction and other expenses associated with the project. Self-liquidating inventory loans are used to finance inventory purchases that will be sold relatively quickly, working capital loans are used to fund daily operations, security dealer financing is used to finance securities dealers, and retailer and equipment financing is used to finance equipment purchases for retailers.

Question 2

The most common type of loans foreign banks make in the U.S.are:

Accepted Answer

Foreign banks typically make commercial loans, which are loans made to businesses or other organizations rather than individuals. These loans can be used for a variety of purposes, such as financing working capital or funding capital expenditures. While foreign banks may also make other types of loans in the U.S., such as real estate loans, commercial loans are the most common.

Question 3

A bank wants to know whether a customer can raise cash in a timely fashion at a reasonable cost.They are most likely to look at which of the following ratios?

Accepted Answer

The ratio (Current assets - Inventory)/Current liabilities, also known as the quick ratio, is a measure of a company's ability to pay off its short-term obligations without relying on the sale of inventory. This is a good measure of a customer's ability to raise cash quickly, as it looks at their current assets excluding inventory, which may not be easily sold.

Question 4

The management of the Frickel Frontier Freight Company wants to make the company private by borrowing money and using the proceeds of the loan to purchase the shares of the company in the market.Management believes they can increase revenues enough to be able to pay off the loan.What type of loan is management getting?

Accepted Answer

The type of loan management is getting is a leveraged buyout, which involves borrowing money to purchase a controlling interest in a company, using the assets of the company being purchased as collateral. This type of loan is commonly used to make a company private and is often considered high-risk due to the large amount of debt incurred.

Question 5

A bank feels that a firm has expenses that are too high.What ratio are they most likely to examine to address this concern?

Accepted Answer

The ratio of Selling and administrative expenses to Net sales is commonly known as the Operating Expense Ratio. It measures a company's efficiency in managing its operating expenses in relation to its revenue. A high ratio indicates that the firm is spending a large portion of its revenue on expenses, which may cause concern for the bank. Therefore, this ratio is most likely to be examined to address the bank's concern about the firm's high expenses.

Question 6

A bank wants to examine how well a customer uses assets to generate sales.They are most likely to look at which of the following ratios?

Accepted Answer

The ratio accounts receivable/(Annual credit sales/360) is the accounts receivable turnover ratio, which measures how efficiently a company uses its assets to generate sales by evaluating how quickly receivables are collected.

Question 7

The Jung Company and the Nguyen Company have combined to build a new container ship docking facility in Charleston Harbor.The facility is expected to take two years to complete and cost $3 billion to construct.These companies want to borrow money in order to build this facility.What type of loan is this most likely to be?

Accepted Answer

A long-term project loan is most suitable for the construction of a new facility, such as a container ship docking facility, as it provides a large amount of funding upfront for a specific project with a long-term repayment schedule. A term business loan is usually shorter and for smaller amounts, while revolving credit financing is more appropriate for ongoing expenses. Leveraged buyout and syndicated loans are also not applicable in this scenario.

Question 8

Mary Williams needs to purchase a new bulldozer and excavator for her construction business and wants to repay the loan over the next three years in regularly scheduled payments.What type of loan does Mary need?

Accepted Answer

A term business loan is a type of loan that is repaid in regularly scheduled payments over a set term, typically between one and ten years. Since Mary Williams wants to repay the loan over the next three years with regularly scheduled payments, a term business loan would be the best option. The other choices, revolving credit financing, long-term project loan, leveraged buyout, and syndicated loan, do not fit her specific repayment needs.

Question 9

A bank has a concern because they feel that a firm has an excessive amount of assets.They do not feel that the firm is efficient in generating sales from their current level of assets.What ratio are they most likely to examine to answer this question?

Accepted Answer

The most relevant ratio in this scenario would be the asset turnover ratio, which is calculated by dividing net sales by total assets. A low asset turnover ratio indicates that the firm is not efficiently using its assets to generate sales revenue. Therefore, the bank would want to examine this ratio to determine if the firm is indeed generating sufficient sales from its level of assets.

Question 10

A bank is concerned because they feel that a firm will not be able to raise enough cash to pay bills that are due within the next year.What ratio are they most likely to examine to address this concern?

Accepted Answer

The most appropriate ratio to assess a firm's ability to pay off short-term debts is the current ratio, which can be calculated as current assets divided by current liabilities. A current ratio of less than 1 indicates that a firm may not be able to pay its current liabilities with its current assets.

Question 11

The Wabash Washing Machine Company has arranged to get a loan from their bank over the next five years.They can borrow up to a pre-specified limit and repay it as many times as they need until the loan matures.The Wabash Washing Machine Company has not pledged any specific collateral for this loan.What type of loan is this most likely to be?

Accepted Answer

Revolving credit financing allows the borrower to borrow up to a pre-specified limit and repay it as many times as they need until the loan matures, which fits the description given in the scenario. Additionally, the fact that no specific collateral is pledged suggests that this is an unsecured loan, which is commonly associated with revolving credit financing. Therefore, option B is the most likely choice.

Question 12

Dick Dowen needs a loan to buy plants and fertilizer for his nursery for the spring planting season.This loan will automatically be paid off as the plants and fertilizer are sold to his customers.What type of loan does Dick need?

Accepted Answer

Dick Dowen needs a self-liquidating inventory loan as the loan will be paid off from the sales generated by the plants and fertilizer. This type of loan is specifically designed for businesses that need to purchase inventory for a specific season or period and need the loan to be paid off as the inventory is sold.

Question 13

Ford Motor Company needs to borrow $50 million.The First National Bank creates a packaged loan with several other banks to lend to Ford Motor Company.This loan package can be sold on the secondary market and carries a rate that is 400 basis points above LIBOR.The First National Bank expects this loan package to ultimately be held by a finance company looking for a good return on their money? What type of loan is this most likely to be?

Accepted Answer

This is most likely a syndicated loan, as it involves several banks pooling their resources to provide a large loan to a single borrower. The fact that it can be sold on the secondary market and carries a rate above LIBOR also supports this conclusion.

Question 14

Randal Ice needs a loan to purchase pet food and other pet supplies for his local pet store over the next six months.He has estimated that the maximum amount of inventory he will need in the next six months is $200,000 and he knows that he will have to use accounts receivables and the inventory he purchases as collateral for the loan.At the end of six months,he hopes he can get the loan renewed.What type of loan does Randal need?

Accepted Answer

Randal needs a working capital loan to purchase pet food and other supplies for his store. He will use his accounts receivables and purchased inventory as collateral for the loan. This type of loan is designed to finance a business's current operations and is typically paid back over a short period of time, such as six months. It is also common for businesses to renew working capital loans as needed. A self-liquidating inventory loan is similar, but is specifically designed for businesses that need to purchase inventory that will be sold quickly. Interim construction financing, security dealer financing, and retailer and equipment financing are all specialized types of loans that do not apply to Randal's needs.

Question 15

Barbara Miller is a small dealer who specializes in healthcare stocks.She needs a loan so that she can sustain her portfolio of stocks until customer-buy orders catch up with what she has already purchased from the market.She only expects to need this loan for a week.What type of loan does Barbara need?

Accepted Answer

Barbara needs a security dealer financing loan, which is specifically designed for dealers in securities to finance their inventory of stocks until they can sell them to customers.

Question 16

Sight n' Sound is a retail store that sells refrigerators,washers,dryers,and other consumer appliances.They need a loan so that they can place an order with Whirlpool.The appliances will be the collateral for the loan and as an appliance is sold,the money will be passed on to the lender.An employee of the lender will periodically check to make sure what has sold and what remains in the store.What type of loan does Sight n' Sound need?

Accepted Answer

The answer of Sight n' Sound is a retail store...

Question 17

A bank wants to examine the adequacy of a business customer's earnings based on the coverage ratios.They are most likely to look at which of the following ratios?

Accepted Answer

D) Income before interest and taxes/Interest payments is a coverage ratio specifically designed to examine how well a company's earnings can cover its interest payments, which is crucial for assessing the adequacy of a business customer's earnings from a lender's perspective.

Question 18

A bank wants to examine how well a customer controls their expenses.They are most likely to look at which of the following ratios?

Accepted Answer

The answer of A bank wants to examine how well...

Question 19

A bank has a concern about the Wilson Company's debt level.They feel that it is too high.What ratio are they most likely to examine to answer this question?

Accepted Answer

The ratio that best measures a company's debt level is the Long-term debt/(Long-term debt + Net worth) ratio, also known as the debt-to-equity ratio. This ratio shows the proportion of a company's long-term debt to its total equity, indicating how much of the company's assets are being financed by debt. A high debt-to-equity ratio indicates that a company has a high debt level, which can be a concern for lenders or investors.

Question 20

A bank wants to examine how well a customer markets their goods and services.They are most likely to look at which of the following ratios?

Accepted Answer

The bank wants to examine how well the customer markets their goods and services. A good measure of this would be the profitability of the company, which can be assessed by the net income after taxes/ net sales ratio. This ratio indicates how much profit the company is generating per dollar of net sales.

Quiz 17: Lending to Business Firms and Pricing Business Loans