Banking Credit Analysis 2

Question 1

Which ratio measures a borrower's ability to service debt from operating cash flow?

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

DSCR compares net operating income to total debt service, indicating whether cash flow is sufficient to cover loan payments.

Question 2

A company has EBITDA of $500,000 and total debt of $2,000,000. What is its leverage ratio?

Accepted Answer

4.0x

Answer

Leverage ratio = Total Debt / EBITDA = $2,000,000 / $500,000 = 4.0x.

Question 3

What does a negative working capital position typically indicate?

Accepted Answer

Potential short-term liquidity risk

Answer

Negative working capital means current liabilities exceed current assets, signaling potential difficulty meeting short-term obligations.

Question 4

Which credit analysis framework uses Character, Capacity, Capital, Collateral, and Conditions?

Accepted Answer

5 Cs of Credit

Answer

The 5 Cs of Credit is a widely used framework for evaluating a borrower's creditworthiness across five key dimensions.

Question 5

In the context of commercial lending, what is 'enterprise value'?

Accepted Answer

Total market value of a firm including debt and equity

Answer

Enterprise value represents the total value of a business, calculated as market cap plus debt minus cash, used to assess collateral in leveraged lending.

Banking Practice Test

Banking Practice Test

Banking Credit Analysis 2