C) Contingent liability
D) Marketability of the product or service
E) None of the above
103. Which dimension of a business firm’s financial and operating performance would the gross profit
margin fit best?
A) Liquidity measure
B) Market indicator
C) Contingent liability
D) Marketability of the product or service
E) None of the above
104. According to the cost-plus model for pricing loans, factors that should be considered in pricing a
loan include:
A) The marginal cost of raising loanable funds to support the loan request
B) Nonfunds operating costs
C) An appropriate margin to compensate the bank for default risk.
D) The bank’s desired profit margin
E) All of the above
105. The business loan pricing method that includes the nonfunds operating costs of making a loan
plus the bank’s desired profit margin is:
A) The Cost-Plus Loan-Pricing Method
B) The Price Leadership Model
C) The Markup Model
D) Customer Profitability Analysis
E) None of the above
106. The business loan pricing method that estimates the total revenues a loan will generate, the net
amount of loanable funds the bank must turn over to the borrower, and the before-tax yield
expected from the loan is the:
A) The Cost-Plus Loan-Pricing Method
B) The Price Leadership Model
C) The Below Prime Rate Pricing Model
D) Customer Profitability Analysis
E) None of the above
107. Suppose a business borrower is quoted a loan rate of two percentage points above the prevailing
prime interest rate posted by leading U.S. banks. This is an example of the:
A) Times-prime pricing method.
B) Market-based pricing method.
C) Cost-plus loan-pricing method.
D) Prime-plus pricing method.
E) Customer profitability analysis pricing method.
108. The method of pricing a business loan that contends that a bank should take the whole customer
relationship into account when pricing each loan request is the:
A) Cost-Plus Loan-Pricing Method
B) Price Leadership Model
C) Below Prime Rate Pricing Model
D) Customer Profitability Analysis
E) None of the above.
109. The business loan pricing method that bases a loan rate on a relatively low money market interest
rate (such as the federal funds rate) plus a small margin to cover risk exposure, other operating
costs, and a profit margin is known as the:
A) Price Leadership Model
B) Below Prime Rate Pricing Model
C) Cost-Plus Loan Pricing Method
D) Customer Profitability Analysis
E) None of the above.
110. Which of the following is a strength of the cost-plus loan pricing method?
A) It considers the competition from other lenders
B) It allows the bank to compete more aggressively with the commercial paper market
C) It considers the cost of loanable funds and the operating costs of running the bank
D) It takes the whole customer relationship into account
E) None of the above
111. Which of the following is a weakness of the price leadership loan pricing method?
A) It does not consider the marginal cost of raising funds
B) It does not give much regard for the competition from other lenders
C) The bank must know what their costs are in order to make correctly price loans
D) The bank must consider the revenues and expenses from all of the bank’s dealings with the
customer
E) None of the above
112. Which of the following is a strength of the markup (or below prime market) loan pricing method?
A) It considers the competition from other lenders
B) It allows the bank to compete more aggressively with the commercial paper market
C) It considers the cost of loanable funds and the operating costs of running the bank
D) It takes the whole customer relationship into account
E) None of the above
113. Which of the following is a weakness of the cost-plus loan pricing method?
A) It does not consider the marginal cost of raising funds
B) It does not give much regard for the competition from other lenders
C) The bank must know what their costs are in order to make correctly price loans
D) B and C above
E) All of the above
114. Which of the following is a strength of the price leadership loan pricing method?
A) It considers the competition from other lenders
B) It allows the bank to compete more aggressively with the commercial paper market
C) It considers the cost of loanable funds and the operating costs of running the bank
D) It takes the whole customer relationship into account
E) None of the above
115. Which of the following is a strength of the customer profitability analysis method for pricing
loans?
A) It considers the competition from other lenders
B) It allows the bank to compete more aggressively with the commercial paper market
C) It considers the cost of loanable funds and the operating costs of running the bank
D) It takes the whole customer relationship into account
E) None of the above
116. The business loan pricing method which starts with a base rate such as the bank’s prime rate and
adds a markup for default and term risk is known as:
A) The Cost-Plus Loan-Pricing Method
B) The Price Leadership Model
C) The Below Prime Rate Pricing Model
D) Customer Profitability Analysis
E) None of the above
117. A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds
costs to the bank are .5 percent. It has also determined that its margin to compensate the bank for
default risk for a particular customer is .30 percent. It has also determined that it wants to have a
profit margin of .3 percent. If this customer wants to borrow $10,000,000, how much in total
interest costs will this customer pay in one year?
A) $450,000
B) $480,000
C) $510,000
D) $560,000
E) None of the above
118. A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds
costs to the bank are .5 percent. It has also determined that its margin to compensate the bank for
default risk for a particular customer is .30 percent. It has also determined that it wants to have a
profit margin of .3 percent. What business loan model is this bank using to price the loan for this
customer?
A) The Cost-Plus Loan-Pricing Method
B) The Price Leadership Model
C) The Below Prime Rate Pricing Model
D) Customer Profitability Analysis
E) None of the above
119. A bank has a prime rate of 6 percent for its best customers. It has determined that the default risk
premium for a particular customer is .4% and the term-risk premium for this loan is .25 percent.
If this customer wants to borrow $5.0 million from the bank, how much in interest will this
customer pay in one year?
A) $332,500
B) $665,000
C) $300,000
D) $320,000
E) None of the above
120. The bank has determined the information below for one of its customers. This customer wants to
borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000.
What is the expected net rate of return on this loan?
Expected Revenues
Expected Costs
Interest Revenues
$1,000,000
Deposit Interest
$30,000
Commitment Fee
$15,000
Cost of Other Funds Raised
$890,000
Deposit Service Fees
$5,000
Loan Processing Costs
$8000
Agency Fees
$6000
Activity and Record Keeping Costs
$16,000
A) 10.00 percent
B) 8.20 percent
C) 10.25 percent
D) 13.75 percent
E) None of the above
121. The bank has determined the information below for one of its customers. This customer wants to
borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000.
What is the interest rate the bank is charging the customer on the funds they have borrowed?
Expected Revenues
Expected Costs
Interest Revenues
$1,000,000
Deposit Interest
$30,000
Commitment Fee
$15,000
Cost of Other Funds Raised
$890,000
Deposit Service Fees
$5,000
Loan Processing Costs
$8000
Agency Fees
$6000
Activity and Record Keeping Costs
$16,000
A) 10.00 percent
B) 12.50 percent
C) 10.25 percent
D) 13.75 percent
E) None of the above
122. SNCs are also known as:
A) Working capital loans
B) Asset-backed loans
C) Syndicated loans
D) Construction loans
E) Inventory loans
123. Small business lending by banks is
A) Declining
B) Rising
C) Relatively constant
D) One with no pattern
E) One with an unknown pattern
124. The most common type of loan foreign banks make in the U.S. are:
A) Commercial loans
B) Retail loans
C) Real estate loans
D) Credit card loans
E) None of the above
125. Which of the following is an example of a captive finance company?
A) Bank of America
B) GMAC
C) Toyota Motors
D) Koch Industries
E) All of the above
126. Lloyd Blenman is building a shopping center in Charlotte and needs to get a loan until the
shopping center is finished and he can get a mortgage on the property. What type of loan does he
need?
A) Self-liquidating inventory loan
B) Working capital loan
C) Interim construction financing
D) Security dealer financing
E) Retailer and equipment financing
127. 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?
A) Self-liquidating inventory loan
B) Working capital loan
C) Interim construction financing
D) Security dealer financing
E) Retailer and equipment financing
128. 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?
A) Self-liquidating inventory loan
B) Working capital loan
C) Interim construction financing
D) Security dealer financing
E) Retailer and equipment financing
129. 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?
A) Self-liquidating inventory loan
B) Working capital loan
C) Interim construction financing
D) Security dealer financing
E) Retailer and equipment financing
130. Sight n’ Sound is a retail store that sells refrigerators, washers, dryers and other consumer
appliances. They need a loan so 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?
A) Self-liquidating inventory loan
B) Working capital loan
C) Interim construction financing
D) Security dealer financing
E) Retailer and equipment financing
131. 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?
A) Term business loan
B) Revolving credit financing
C) Long term project loan
D) LBO loan
E) Syndicated loan
132. The 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 500 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 mostly likely to be?
A) Term business loan
B) Revolving credit financing
C) Long term project loan
D) LBO loan
E) Syndicated loan
133. 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 mostly likely to be?
A) Term business loan
B) Revolving credit financing
C) Long term project loan
D) LBO loan
E) Syndicated loan
134. 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?
A) Term business loan
B) Revolving credit financing
C) Long term project loan
D) LBO loan
E) Syndicated loan
135. The management of the Frickel Frontier Freight Company wants to take 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?
A) Term business loan
B) Revolving credit financing
C) Long term project loan
D) LBO loan
E) Syndicated loan
136. A bank wants to examine how well customer controls their expenses. They are most likely to
look at which of the following ratios?
A) Wages and Salaries/Net Sales
B) Accounts Receivables/(Annual credit sales/360)
C) Net income after taxes/Net Sales
D) Income before interest and taxes/Interest payments
E) (Current assets – Inventory)/Current liabilities
137. 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?
A) Wages and Salaries/Net Sales
B) Accounts Receivables/(Annual credit sales/360)
C) Net income after taxes/Net Sales
D) Income before interest and taxes/Interest payments
E) (Current assets – Inventory)/Current liabilities
138. 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?
A) Wages and Salaries/Net Sales
B) Accounts Receivables/(Annual credit sales/360)
C) Net income after taxes/Net Sales
D) Income before interest and taxes/Interest payments
E) (Current assets – Inventory)/Current liabilities
139. 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?
A) Wages and Salaries/Net Sales
B) Accounts Receivables/(Annual credit sales/360)
C) Net income after taxes/Net Sales
D) Income before interest and taxes/Interest payments
E) (Current assets – Inventory)/Current liabilities
140. A bank wants to know whether a customer can raise cash in a timely fashion at a reasonable cost.
They are mostly likely to look at which of the following ratios?
A) Wages and Salaries/Net Sales
B) Accounts Receivables/(Annual credit sales/360)
C) Net income after taxes/Net Sales
D) Income before interest and taxes/Interest payments
E) (Current assets – Inventory)/Current liabilities
141. 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?
A) Selling and administrative expenses/Net sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
E) Long term debt/(Long term debt + Net worth)
142. 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?
A) Selling and administrative expenses/Net sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
E) Long term debt/(Long term debt + Net worth)
143. A bank feels that a firm has expenses that are too high. What ratio are they most likely to
examine to address this concern?
A) Selling and administrative expenses/Net sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
E) Long term debt/(Long term debt + Net worth)
144. 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?
A) Selling and administrative expenses/Net sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
E) Long term debt/(Long term debt + Net worth)
145. A bank wants to examine the financial success of a company by examining the profits of a
company. What ratio will help the bank examine this issue?
A) Selling and administrative expenses/Net sales
B) Net sales/Total assets
C) Current assets-Current liabilities
D) Net income/Total assets
E) Long term debt/(Long term debt + Net worth)
146. A firm submits their financial records to a bank. Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s
net profit margin?
A) 10.00%
B) 22.22%
C) 44.44%
D) 50%
E) None of the above
147. A firm submits their financial records to a bank. Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales (all of which are on credit and $2000 in net
income. What is this firm’s average collection period?
A) 18 days
B) 45 days
C) 72 days
D) 162 days
E) None of the above
148. A firm submits their financial records to a bank. Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s
net working capital?
A) $9000
B) $4500
C) $4000
D) $2000
E) None of the above
149. A firm submits their financial records to a bank. Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s
leverage ratio?
A) 22.50%
B) 44.44%
C) 50.00%
D) 88.89%
E) None of the above
150. A firm submits their financial records to a bank. Upon examination, the bank discovers that this
firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and
equipment and that their assets totaled $9000. In addition this bank discovered that the firm had
$2000 in current liabilities, $2500 in long term debt and $4500 in net worth. Finally this bank
discovered that this firm had $20,000 in net sales and $2000 in net income. What is this firm’s
acid test ratio?
A) 1.00
B) 2.00
C) 0.33
D) 3.00
E) 1.50
151. Banks need to be able to compare the firm they are examining to its industry. One company that
provides information to banks about the industries their customers are in is:
A) Standard and Poors
B) Moody’s
C) Dun and Bradstreet
D) Morgan Stanley
E) None of the above
152. A firm has net sales of $25,000, costs of goods sold of $10,000, selling, general and
administrative expenses of $8000 (of which $2000 are depreciation expenses) and taxes (in cash)
of $3000. What is this firm’s operating cash flow (using the traditional or direct method)?
A) $4,000
B) $15,000
C) $5,000
D) $8,000
E) None of the above
153. A bank wants to estimate a firm’s future financial condition. Which of the following is
something that allows a bank to do this?
A) Statement of cash flows
B) Pro forma statement
C) Balance sheet
D) Income statement
E) None of the above
154. A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds
is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%.
They have also estimated that the term risk premium is .5%. What is the interest rate this bank
will charge if they use the cost plus pricing model?
A) 8.5%
B) 9%
C) 12%
D) 9.5%
E) None of the above
155. A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds
is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%.
They have also estimated that the term risk premium is .5%. What is the interest rate this bank
will charge if they use the price leadership model (and the prime rate as their base rate)?
A) 8.5%
B) 9%
C) 12%
D) 9.5%
E) None of the above
