CCM Credit Risk Evaluation 2

Question 1

A company has a current ratio of 0.8 and a quick ratio of 0.4. What does this indicate about its short-term liquidity?

Accepted Answer

Potential liquidity problems with heavy reliance on inventory

Answer

A current ratio below 1.0 and a quick ratio of 0.4 indicate the company relies heavily on inventory to meet short-term obligations, signaling liquidity risk.

Question 2

Which financial metric measures how efficiently a company collects its receivables?

Accepted Answer

Days Sales Outstanding (DSO)

Answer

DSO measures the average number of days a company takes to collect payment after a sale, indicating receivables management efficiency.

Question 3

In credit risk assessment, a 'concentration risk' refers to:

Accepted Answer

Excessive exposure to a single customer, industry, or geography

Answer

Concentration risk arises when a credit portfolio has excessive exposure to one customer, sector, or region, amplifying potential losses if that segment defaults.

Question 4

A buyer requests Net-60 terms but your analysis shows their DSO is 85 days. What is the most appropriate action?

Accepted Answer

Approve with a reduced credit limit and monitor closely

Answer

Approving with a reduced limit and close monitoring balances the business relationship while mitigating the elevated payment risk indicated by the high DSO.

Question 5

Which of the following best describes 'systematic risk' in a credit portfolio?

Accepted Answer

Market-wide risk that affects all borrowers simultaneously

Answer

Systematic risk is macro-level risk (economic downturns, interest rate changes) that impacts all borrowers and cannot be eliminated through diversification.

(CCM) Certified Credit Manager Practice Test

(CCM) Certified Credit Manager Practice Test

CCM Credit Risk Evaluation 2