A business usually has a strong need for financing but represents too much risk to the bank as it progresses through which stage of its life cycle Start-up Adolescence Maturity Decline A business that generally sells a major portion of its product to one buyer has leverage in that it can then dictate the terms of the relationship with the purchaser True False A profitable business requires a considerable level of financing to entirely support increasing levels of operating expenses when in a growth phase True False A business that generally sells a major portion of its product to one buyer has leverage in that it can then dictate the terms of the relationship with the purchaser True False A business usually has the smallest need for financing as it progresses through which stage of its life cycle Start-up Growth Maturity Decline A business that generally sells a major portion of its product to one buyer has leverage in that it can then dictate the terms of the relationship with the purchaser True False A business usually has the greatest need for financing as it progresses through which stage of its life cycle Adolescence Growth Maturity Transformation A profitable business requires a considerable level of financing to entirely support increasing levels of operating expenses when in a growth phase True False A business usually has the smallest need for financing as it progresses through which stage of its life cycle Start-up Growth Maturity Decline A profitable business requires a considerable level of financing to entirely support increasing levels of operating expenses when in a growth phase True False As a stage in the life cycle of an industry or business, "maturity" refers to… when market demand has exceeded the available supply and sales and profits grow very rapidly a fundamental change in the operations of a business intended to try and stave off demise products remaining widely accepted and in high demand, and the capacity of the market growing as new competitors enter the marketplace the set of activities that accompany sales shifts from expansion to contraction the life cycle stage in which a business is successfully dissolved As a stage in the life cycle of an industry or business, "adolescence" refers to… the set of activities that accompany sales shifts from expansion to contraction when the product being sold has achieved a degree of acceptance and sales levels begin to increase products remaining widely accepted and in high demand, the capacity of the market has grown as new competitors enter the marketplace when market demand has exceeded the available supply and sales and profits grow very rapidly the life cycle stage in which a business is successfully dissolved As a stage in the life cycle of an industry or business, "transition" refers to… any movement from one life cycle stage to the next the life cycle stage in which a business is successfully dissolved when the product being sold has achieved a degree of acceptance and sales levels begin to increase a fundamental change in the operations of a mature business intended to try and stave off demise the set of activities that accompany sales shifts from expansion to contraction Credit risk varies depending on the stage of an industry's life cycle Emerging and declining industries generally carry more risk, while growing and mature industries are less risky True False Credit risk varies depending on the stage of an industry's life cycle Emerging and declining industries generally carry less risk, while growing and mature industries are more risky True False During a period of economic contraction as sales begin to decline, receivables (trade debtors) and inventory (stock) levels tend to decrease and capital spending slows or stops True False During a period of economic contraction as sales begin to decline, receivables (trade debtors), inventory (stock) and capital spending levels tend to rise True False During a growth phase, a profitable business requires a greater level of financing solely to support increasing levels of receivables (trade debtors) and inventory (stock) True False Integrity is a critical management characteristic because it is the single best indicator of success for a business True False Integrity is a critical management characteristic because… (24 Points) the lender's relationship is with management, not with the business it is the single most important indicator of a company's repayment ability most of the information needed to properly assess credit risk is provided by management it is the best single indicator of business success In assessing the likelihood of loan repayment, it is equally important to focus analysis on management skill and management integrity, since both are fundamental to successful business operations True False In assessing the risk associated with loan repayment, it is equally important to focus analysis on management skill and management integrity, because… low integrity may be offset by successful application of business practices in highly competitive situations weakness in one must be offset by strength in the other if debt is to be serviced properly skill can rarely be supplemented readily from external sources (0 Points) both skill and integrity are fundamental to successful business operations In general, a firm that sells a minority of its output to any one buyer is said to have "power" or leverage, in that it can normally dictate the terms of the relationship to the purchaser (24 Points) True False If barriers to entry are considered to be low in a given industry, you could expect to see… a concerted effort on the part of firms in the industry to increase switching costs little effort on the part of firms in the industry to differentiate their product sustained attempts on the part of firms in the industry to minimise value-added product features sustained attempts on the part of firms in the industry to minimise advertising costs If the bargaining power of buyers is weak in a given industry, the suppliers to that sector may well experience… movement by individual buyers to grow their volume of purchases efforts by buyers to increase switching costs pressure from buyers to drive up supply prices by threat of forward integration demands from buyers to stretch trade payment terms If products are well differentiated in a given market, a potential entrant may face heavy development and advertising costs to establish itself and its product, thus reducing the threat of entry True False Management succession is a critical issue to consider when analysing the management aspect of credit risk primarily because… corporate governance efforts suffer without smooth transition in management it provides a head start on future lending relationships and opportunities loans made now depend on cash flow in the future to be repaid as scheduled it is important to know exactly who the bank will be working with should the current CEO depart Market overcapacity decreases credit risk because it suggests customers are demanding more of a given product than the borrower can produce True False Management succession is a critical issue to consider when analysing the management aspect of credit risk primarily because… corporate governance efforts suffer without smooth transition in management it provides a head start on future lending relationships and opportunities loans made now depend on cash flow in the future to be repaid as scheduled it is important to know exactly who the bank will be working with should the current CEO depart Market overcapacity decreases credit risk because it suggests customers are demanding more of a given product than the borrower can produce (24 Points) True False Management experience plays an important role in the lending decision process because… the majority of firms that ultimately fail have inexperienced management in the end, management is responsible for all the decisions and policies adopted and implemented by the company experience in one business sector is easily transferable to other business sectors management integrity is a function of job experience The degree of experience present in the upper management of a business plays a key role in assessing management risk because most firms that go out of business so because of inexperienced management management integrity is a function of job experience the time spent in a specific business or industry is the best overall indicator of competence management is ultimately responsible for decisions and policies adopted and implemented by the business The generation of future cash flow is typically as dependent on management integrity as it is on management skill True False The extent of the experience present in a firm's upper management plays an important role in the credit decision because the time spent in a business or industry is the best indicator of competence management is ultimately responsible for all the decisions and policies adopted and implemented by the business experience in one industry is usually easily transferred into success in other industries most businesses that fail are characterised by inexperienced management Which of the following factors does NOT place the supplier in a position of power, or leverage, in the supplier/buyer relationship? (select all that apply) Importance of the suppliers’ product as an input to industry's products A few suppliers dominate the market Minimal switching costs There is an abundance of substitute products There are many suppliers producing the product Which of the following is least adversely affected by market overcapacity? Product pricing Number of companies in the market Product availability Unit sales Product quality Which of the following factors does NOT place the supplier in a position of power, or leverage, in the supplier/buyer relationship? (select all that apply) Importance of the suppliers’ product as an input to industry's products A few suppliers dominate the market Minimal switching costs There is an abundance of substitute products There are many suppliers producing the product When extending credit to firms in very mature industries, it is critical not only to identify which stage of the cycle an individual business and its industry are in, but also… how a firm seeks to maintain existing basic technologies ( what the industry is doing to retain experienced management teams what marketing efforts the industry is making to maintain existing customers what a firm is doing to make the transition to stay in business Which of the following is least adversely affected by market overcapacity Product pricing Number of companies in the market Product availability Unit sales Product quality Which of the following factors does NOT place the supplier in a position of power, or leverage, in the supplier/buyer relationship? (select all that apply) Importance of the suppliers’ product as an input to industry's products A few suppliers dominate the market Minimal switching costs There is an abundance of substitute products There are many suppliers producing the product Which one of the following elements places the supplier in a position of power, or leverage, in the supplier/buyer relationship? There are many suppliers producing the product Considerable switching costs The supplier's product is relatively a unimportant component of the industry's products There are a number of substitute products With respect to integrity related matters, credit agency reports… that fail to reflect payment defaults indicate management integrity is sound that show slow trade payments always point to integrity issues that reflect payment defaults almost always point to integrity issues are not helpful in assessing integrity because management provides most of the information contained in the reports With respect to the role integrity plays in evaluating credit risk, credit agency reports reflecting payment defaults almost always point to integrity issues True False With respect to integrity related matters, credit agency reports… that reflect payment defaults almost always point to integrity issues that show slow trade payments always point to integrity issues are not helpful in assessing integrity because management provides most of the information contained in the reports that fail to reflect payment defaults indicate management integrity is sound Of the following factors, which ones place the supplier in a position of power, or leverage, in the supplier/buyer relationship? (select all that apply) There are few suppliers producing the product Suppliers’ ability to integrate backward There are many suppliers producing the product Switching costs are minimal There are a lack of substitute products For the purpose of analysing the management aspect of credit risk, management succession is a critical issue to consider principally because… \ loans made today will depend on future cash flow to be repaid as scheduled it is important to know exactly who the lender will be working with should the current CEO depart it provides a head start on future lending relationships and opportunities corporate governance efforts suffer without smooth transition in management For a business with numerous small buyers, the pressure from those buyers would likely… be more severe than the pressure from suppliers, thereby causing the relative level of inventory (stock) to stretch over time be less severe than the pressure from suppliers, thereby causing the relative level of inventory (stock) to lessen over time put little pressure on prices by virtue of significant individual purchases, thereby leaving prices largely unaffected by buyer pressure put great pressure on prices by virtue of significant individual purchases, thereby tending to drive prices down over time Receivables (trade debtors) and inventory (stock) levels tend to increase, while capital spending slows or stops, during a period of economic contraction as sales begin to decline True False Since a borrower's willingness to repay debts is an integrity related issue, credit agency reports… that show slow trade payments always point to integrity issues are not helpful in assessing integrity because management provides most of the information contained in the reports that fail to reflect payment defaults indicate that management integrity is sound that reflect payment defaults almost always point to integrity issues