BMO Financial Analysis & Risk Evaluation 2

Question 1

A company has a current ratio of 0.8. What does this indicate about its short-term liquidity?

Accepted Answer

The company may struggle to meet short-term obligations

Answer

A current ratio below 1.0 means current liabilities exceed current assets, signaling potential difficulty covering short-term debts.

Question 2

Which financial metric best measures how efficiently a company uses its assets to generate revenue?

Accepted Answer

Asset turnover ratio

Answer

Asset turnover ratio (Revenue ÷ Total Assets) measures how efficiently a company generates sales from its asset base.

Question 3

In credit risk analysis, what does a borrower's 'debt service coverage ratio' (DSCR) of 1.25 mean?

Accepted Answer

The borrower has 25% more income than needed to service debt

Answer

A DSCR of 1.25 means the borrower generates $1.25 in net operating income for every $1.00 of debt service, indicating a 25% cushion.

Question 4

What is the primary purpose of stress testing in financial risk management?

Accepted Answer

To evaluate how a portfolio performs under extreme adverse scenarios

Answer

Stress testing simulates extreme but plausible adverse conditions to assess potential vulnerabilities in a portfolio or institution.

Question 5

A company's EBITDA margin decreased from 22% to 16% year-over-year despite revenue growth. What is the most likely cause?

Accepted Answer

Rising operating costs outpacing revenue growth

Answer

EBITDA margin compression despite revenue growth typically signals that operating expenses (COGS, SG&A) are rising faster than revenue.

(BMO) Bank of Montreal Assessment Practice Test