Chapter 10

Question 1

Which of the following industries is the least debt intensive industry?
A. Pharmaceutical industry
B. Air transportation industry
C. Electric services industry
D. Hotel industry

Answer 1

A. Pharmaceutical industry

Question 2

Consider the following statement: “Large firms tend to have higher leverage than small firms because they have lower business risks (on average).” This statement is
A. True
B. False

Answer 2

A. True

Question 3

Multiple bank borrowing is
A. Most common in countries with strong legal protection of creditors.
B. Most common in countries with weak legal protection of creditors.
C. Not associated with the degree of legal protection of creditors.

Answer 3

B. Most common in countries with weak legal protection of creditors.

Question 4

Supplier financing is
A. Most common in countries with strong legal protection of creditors.
B. Most common in countries with weak legal protection of creditors.
C. Not associated with the degree of legal protection of creditors.

Answer 4

B. Most common in countries with weak legal protection of creditors.

Question 5

Consider the following statement: “One mechanism that commercial lenders use to reduce credit risk is to lengthen the maturity of the loans they extend.” This statement is
A. True
B. False

Answer 5

B. False

Question 6

In cases where a borrower’s cash needs are difficult to anticipate, it is most likely to make use of
A. Term loans
B. Lease financing
C. Open lines of credit
D. Mortgage loans

Answer 6

C. Open lines of credit

Question 7

Which of the following types of collateral is generally the most desirable form of security?
A. Inventory
B. Real estate
C. Equipment
D. Receivables

Answer 7

D. Receivables

Question 8

Consider the following information about company A’s performance and financial position in year t:
- Earnings before interest and taxes = €95;
- Depreciation = €5
- Interest = €5
- Taxes = €27
- Preference dividends = €0
- Debt repayment = €20
Company A’s fund flow coverage ratio in year t equals
A. 4.00
B. 3.80
C. 3.60
D. 2.98

Answer 8

D. 2.98

Question 9

Which of the following is not a financial covenant that is commonly used in loan contracts?
A. Maintenance of a minimum fund flow coverage ratio
B. Maintenance of a maximum ratio of total liabilities to net worth
C. Maintenance of a minimum return on assets
D. Maintenance of a minimum net working capital balance

Answer 9

C. Maintenance of a minimum return on assets

Question 10

Consider the following statement: “The number of European firms that receives an ‘A’ rating typically exceeds the number of European firms that receives an ‘AA’ rating.” This statement is
A. True
B. False

Answer 10

A. True

Question 11

Which of the following variables is positively associated with a firm’s debt rating?
A. Net debt to net capital
B. Firm size
C. NOPAT to net capital
D. A, B and C
E. B and C

Answer 11

E. B and C

Question 12

Company X has a significantly lower Altman Z score than company Y. This implies that
A. Company X’s bankruptcy probability exceeds company Y’s bankruptcy probability.
B. Company Y’s bankruptcy probability exceeds company X’s bankruptcy probability.

Answer 12

A. Company X’s bankruptcy probability exceeds company Y’s bankruptcy probability.