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Good evening aspirants, we are back with third article on commercial credit. Hope you find this informative and helpful.

Question (31) What type of credit rating will most likely cause a borrower’s credit score to be adjusted downward because of an expected downturn in the borrower’s industry?
a) Fail grade rating.
b) Single risk rating.
c) Facility risk rating.
d) External international rating.

Question (32) Which describes the absolute priority rule with respect to payments made to creditors at default?
a) Subordinated debt is paid before insolvency-related costs.
b) Available funds are paid first to the lowest ranked class until the borrower’s obligations are fully satisfied.
c) Available funds are paid first to the highest ranked class until the borrower’s obligations are fully satisfied.
d) Distributions to each ranked class are paid out proportionately based on its percentage in the company’s
capital structure.

Question (33) What is the profit before tax and financial costs for a company with sales of INR 5,000,000, cost of goods sold of INR 2,600,000, operating expenses of INR 1,400,000, interest expense of INR 60,000 and tax expenses of INR 125,000?
a) INR 815,000
b) INR 940,000
c) INR 1,000,000
d) INR 1,185,000

Question (34) What is meant by the term “excess borrowings” under the Tandon Committee approach to lending?
a) The amount borrowed exceeds current liabilities.
b) The liquidity level exceeds the minimum required.
c) The maximum permissible bank borrowings exceed current assets.
d) The minimum required net working capital exceeds the actual amount.

Question (35) What type of credit rating is most appropriate to evaluate the credit risk of a group of borrowers that has never borrowed money before?
a) Corporate family rating.
b) Issue rating.
c) Issuer rating.
d) Short-term rating.

Question (36) Which item is evaluated more substantively when determining the amount of financing available to a company under the assessed bank finance method as compared to the maximum permissible bank finance
a) Assets.
b) Current ratio.
c) Liquidity.
d) Trade payables.

Question (37) How should a customer’s account activity be monitored to ensure end-use of funds?
a) Review a percentage of all the transactions.
b) Scrutinise all the transactions regardless of value.
c) Review the transactions above a threshold amount.
d) Browse through the account and investigate any unusual transaction.

Question (38) Companies operating in which industry are most likely to have a high investment in fixed infrastructure assets, with little inventory?
a) Electric utility.
b) Food retailing.
c) Home construction.
d) Financial services consulting.

Question (39) Which factor will decrease a buyer’s market risk in the long term in conditions where the supplier has high bargaining power?
a) Buyer’s ability to pay.
b) Increase in supplier’s market share.
c) Availability of substitute products in the market.
d) High demand skilled workers are employed by the supplier.

Question (40) What information should be reviewed in the periodic progress reports on implementation of a project to assess likelihood of meeting the loan repayment obligations?

a) The project implementation is on schedule.
b) Funding is available to cover any cost overruns.
c) There are orders for the project outputs once completed.
d) Project reports have been approved by the lender’s engineer

Question (41) Why is management integrity the most critical factor when assessing the impact of management
risk on a company’s credit risk?
a) Management lacking integrity may prioritise payments to other external stakeholders.
b) A lack of integrity can result in a company using cash flows for purposes other than interest or loan payments.
c) A lack of integrity can result in a company’s underperformance and subsequent inability to meet its payment
d) A positive assessment of management integrity is necessary for a lender to be confident in the reliability of the information provided by the company.

Question (42) What governing body for the Insolvency and Bankruptcy Code would set up accreditation for insolvency professionals and information utilities?
a) Adjudicating Authority.
b) Debt Recovery Tribunal.
c) Insolvency Professional Agency.
d) Insolvency and Bankruptcy Board of India.

Question (43) Which proposition is least likely to be considered for a term loan for its financing requirements?
a) Expansion of a fleet of vehicles.
b) Capital expenditure for a power plant.
c) An instalment financing construction project.
d) Daily working capital requirements for a small business.

Question (44) What is the primary reason for reviewing external information when assessing a company’s credit quality?
a) To evaluate any adverse press coverage of the company.
b) To assess the company’s vulnerability to natural disasters.
c) To review any gradual economic changes that may affect the company’s industry.
d) To evaluate what developments may create opportunities for the company or adversely affect its performance.

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