1. A manufacturing firm has sales of $780K of which COGS is 54%, raw material purchases are 32% and labour costs are 17% (balance of inputs are from fixed costs). Its A/R DSO is 46 days, inventory DCO is 16 days, supplier credit DPO is 37 days and labour credit DWO is 14 days. Its sales next year are forecasted to increase by 15%. Assuming terms of trade are stable, how much extra liquidity (000 = K) will be required to finance the increase in sales?: *

A. $13K

B. $22K

C. $48K

D. $123K

2. A firm selling on 30-day payment terms (DSO = 34 days) reckons it can increase sales by 20% if it offers 45 days payment terms with actual payments coming in 50 days. Its sales are currently $567K. Inventory balances ($56K) and supplier credit ($34K) would increase in line with sales. The banks $30K short-term revolving line of credit is margined requiring 200% coverage by A/R and is currently 66% drawn. How much extra financing is required?: *

A. $11K

B. $55K

C. $21K

D. $34K

3. A firm (000 = K) is currently generating cash flow from operations of $200/yr. This is expected to grow by 7% next year. It has mandatory capex (i.e. needed to replace existing production capacity) of $67K. Existing long-term debt (LTD) is $600K repaid over 6 years in equal installments. To achieve the 7% growth, the firm needs to invest $300K in extra output capacity and wants to borrow a further $250K repayable over 5 years (it has enough surplus liquidity for the $50K down-payment). Will the firm have repayment capacity next year to handle new debt?: *

A. $57K surplus

B. $21K shortfall

C. $3K shortfall

D. $16K surplus

4. A firm has total A/R of $560K which is pledged to a bank. 20% of debts are less than $300; 50% of debts are between $300 and $5,000 with historical recovery rates of 50% after collection costs; the balance is from 3 large hypermarkets who were buying on LT contracts, none of which were under dispute. 2 unpaid suppliers to the firm (owed $14.6k and $13.4K) are included in the A/R. Past experience indicates that administration costs (legal, court etc.) are 15% of collectible A/R. What is the recovery rate on the pledged collateral: *

A. 78%

B. 43%

C. 67%

D. 28%

5. A bank is financing 100% of the construction costs of a real estate development secured by a 1st mortgage on the property (land + structure). With a full draw-down of the facility, the $340K budgeted project cost is now only 75% completed vs. estimated costs to fully complete. The land was appraised at $185K based on the planned construction. Unpaid sub-trades, whose value is not yet counted in the buildings value to date, amount to $13. The expected cost over-run cannot be covered by the owners. The bank may fund the costs to complete if it is in its best interests. Alternatively, it can demolish the structure and sell the raw land for $350K on a standalone, undeveloped basis since RE prices have risen. It can then possibly sue the guarantor for any unrecovered amounts. Demolition costs of the existing structure are estimated to be $65K. Assuming the completed property could be sold at its invested cost outlay, what is the loan-to-value percentage of its two options (complete/demolish)?: *

A. 88%/112%

B. 54%/156%

C. 71%/119%

D. 109%/56%

6. A lender to a large corporation has $150 million in subordinated (junior vs. all other debts), unsecured bonds outstanding. Senior secured debentures amount to $75 million. Short-term bank debt secured by a charge over $50 million of A/R amounts (40% collectible) to $14 million. Trade suppliers are owed $34 million. The income tax authorities are owed $12 million. Unpaid payroll deductions for the states social security taxes are $4.5 million. Customer deposits for undelivered product orders amount to $1.5 million. The net realizable liquidation value of all assets is estimated to be $234 million after all costs. The recovery rate on the subordinated bonds will be: *

A. 62%

B. 89%

C.108%

D. 43%

7. A bank has a SME customer who is over-trading. While its sales and profit growth are impressively high, the firms leverage and liquidity have been consistently eroded and have now reached a danger zone. Generous dividends continue to be paid. The bank is unwilling to extend more credit. The best solution(s) going forward would be: *

A. Improve profitability

B. Improve asset efficiency by liquidating surplus assets (if any)

C. Cut back dividends

D. Reduce growth rate or invest growth equity capital

E. All of the above

8. Due to poor financial management (capex funded by short term debt and operating cash flow), a firm finds itself in a liquidity bind. There is no cash nor further room on the short-term line of credit to pay over-due suppliers who are threatening legal action. Profitability is very good and leverage (vs. peers) is quite modest. Despite the mistake, the bank has confidence in the operational skills of management and likes the industrys market prospects. A sensible solution to the problem is: *

A. Sell assets to raise cash to pay ST creditors

B. Negotiate special terms from suppliers seeking payment deferrals

C. Re-finance fix assets with a term loan using proceeds to boost liquidity

D. Improve A/R collections to generate more cash

9. A long time 50-year-old retail customer of a bank (credit cards, car loans & a home mortgage all satisfactorily handled) approaches the bank to request a $150K loan to fund 100% of the costs of launch a new business venture (a restaurant). The customer was employed in the restaurant supply sector for 20 years but lost his job due to a downsizing. He previously owned and operated a restaurant for 2 years. He offers security of his personal guarantee and pledge of the restaurant assets (NRV = $60K). He and wife have PNW of $560K, including a $300K residence with a $60K mortgage from your bank. Your credit hypothesis would be: *

A. Decline; too risky a sector & start-ups have no proven track record

B. Offer $150K secured by restaurant assets ($60K) and pledge of $90K in liquid assets (cash, stocks, bonds etc.)

C. Offer a $100K 5-year term loan based upon i) $65K equity infused into the business as owners capital (bank will lend); ii) pledge of restaurant assets ($50K value) plus 2nd mortgage on home for loans; iii) pledge of key-person life insurance & iv) satisfactory business plan, including cash flow projections

D. Approve $150K based obtaining 2 guarantees (husband and wife) secured by 2nd mortgage on the home

10. A loan has a probability of default of 6% and a recovery rate given the collateral security of 60%. Funding costs, net of central bank reserve requirements on deposits, are 5.4%. To achieve target return on shareholder capital (12%), the bank needs a return on earning assets of 1.1%. What interest rate should the bank charge for the loan: *

A. 10.7%

B. 8.9%

C. 6.7%

D. 11.9%