Question

In: Accounting

Which of the following statements describes a “Condition” strength or weakness for a company in the...

Which of the following statements describes a “Condition” strength or weakness for a company in the 5 Cs of credit framework?

The risks associated with the industry are high.

The management team has a great reputation among customers and suppliers.

The company has redundant assets that are not currently used in business.

The operating cash flow of the company is low.

Which of the following scenarios would NOT be considered a strength when assessing the management team as part of evaluating a company’s character?

Financial reports are not widely shared and performance measures have not been identified.

Management has clear communication of expectations to the team.

Management has identified clear risk mitigation strategies.

Management has experience in the industry and financial acumen.

Select the loan contract with the lowest risk.

An unsecured demand loan with monthly payments

An unsecured term loan with a bullet principal payment at maturity

A demand loan with monthly payments secured by assets

A term loan with a bullet principal payment at loan maturity secured by assets

Solutions

Expert Solution

1. (c) The company has redundant assets that are not currently used in business.

Explanation:

The 5 Cs of credit framework includes character, cash flow, collateral, capital and conditions. The quality of assets in which the business has invested its capital is not a concern in credit framework. It focuses on more capital investment by the owner of the business to safeguard the interest of the banking institution.

2. (a) Financial reports are not widely shared and performance measures have not been identified

Explanation:

While assessing the management team as a part of evaluating company's character, the failure of management to share financial reports widely is not a strength. Moreover, the management has failed to identify the performance measures for reporting the performance of its organization which is also a sign of weakness.

3. (c) A demand loan with monthly payments secured by assets

Explanation:

A loan is said to be of lower risk because of the following conditions

  1. Secured by an asset.
  2. The outstanding amount is received on regular basis and not in single payment at the end of the loan period.

Option (c) has fulfilled both the conditions and is therefore, the loan contract with lowest risk.

ekkarill92 answered 2 years ago
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