Question

Which of the following is an advantage of using equity as a source of funding?

1. It won’t dilute existing shareholder’s value of change ownership percentage.

2. The cost of equity is usually lower than the cost of credit.

3. It doesn't have additional financial commitments.

4. It’s very liquid and always accepted.

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If you borrow $5,000 with 4% interest compounded annually, how much total interest do you need to pay after 2 years?

1 400

2. 404

3. 412

4. 408

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Assuming all else is equal, which of the following loans is most likely to have the lowest total interest payments?

1.Unsecured non-amortizing loan

2. Unsecured amortizing loan

3. Secured non-amortizing loan

4. Secured amortizing loan

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Based on the loan details and payment schedule below, what type of loan is it?

Loan details

Principal payment: 20,000

Loan term: 10 years

Interest rate: 5%

Collateral: House

Year	Beginning Balance	Interest	Principal	Ending Balance
1	200,000	9,641	15,815	184,185
2	184,185	8,832	16,624	167,561
3	167,561	7,981	17,475	150,087
4	150,087	7,087	18,369	131,718
5	131,718	6,147	19,308	112,410
6	112,410	5,160	20,296	92,114
7	92,114	4,121	21,335	70,779
8	70,779	3,030	22,426	48,353
9	48,353	1,882	23,573	24,780
10	24,780	676	24,780	0

1. Unsecured loan with equal payments

2. Secured loan with equal payments

3. Secured equal-amortizing loan

4. Unsecured equal-amortizing loan

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What is the advantage of a variable-interest loan?

1. Protects the borrower from rising interest rates

2 .Reduces the total interest payments

3. Protects the borrower from falling interest rates

4. Makes it easier for the borrower to plan for future payments.

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What does underwriting include in the general lending process?

1.Creating documentation for the borrower to sign

2.Assessing the borrower’s eligibility for the loan

3.Discussing loan amount and interest rate with the borrower

4. Monitoring loan account

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Which of the following tools is used to analyze the industry attractiveness in the credit application process?

1. Management analysis

2. PESTEL analysis

3. SWOT analysis

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What do the liquidity ratios tell you in the financial analysis?

1. The capital structure of a company

2. The profitability of the company

3. The efficiency of inventory

4. The company’s ability to pay off debt obligations

5. Ratios analysis

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Which of the following are NOT part of the 5Cs of credit? Select ALL applicable.

1. Conditions

2. Collateral

3. Candor

4.Character

5. Commitment

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In the 5 Cs of credit, what does capacity measure?

1. The company’s profitability and cash flow to manage operations and growth

2. The financial structure and overall financial strength of a company

3. The management’s attitude towards risk and growth

4. The assets available to secure the debt in the event of a default

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four questions should be answered. Kindly take note of it.

Part 1

Answer is option 3

3. It doesn't have additional financial commitments.

The company has no pressure to repay the funds acquired by issuing equity. More in case of loss or any adverse situation, it is not compulsory to pay dividends also.

Part 2

Answer is option 4

4. 408

Interest = (5000*(1.04^2))-5000 = 408

Part 3

Answer is option 2

2. Unsecured amortizing loan

Non-amortizating loans and secured loans carry higher interest rates compared to amortizing and unsecured loans

Part 4

Answer is option 2

2. Secured loan with equal payments

As the loan is collateralized, it is a secured loan. As interest and principal varies it means, it is not an equal amortization loan.