FIN320 - Exam

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  1. Limitations of Financial Statements
    Problem with benchmarks 

    Window dressing

    Historical data

    Qualitative aspects
  2. Problem with benchmark
    Many firms have product lines that span a range of industries. 

    The diversity of products makes it hard to develop suitable benchmarks against which to evaluate firm performance.

    Average ratios for firms within the industry may be available, but not the dispersion thereof.

    This makes the use of benchmarks less reliable and less useful.
  3. Window Dressing
    Actions taken or not taken prior to issuing financialstatements in order to improve the appearance of the financial statements.
  4. Historical Data
    Ratios are calculated using historical financial statements.

    Unless the figures in the financial statements are marked to market, it is hard to obtain a true picture.

    Further, the lender is interested in obtaining a futuristic view and it may not be correct to predict the future on past trends alone.
  5. Qualitative Aspects
    Ignores qualitative aspects such as the quality of management, regulatory changes and changes in the domestic and international economies.
  6. Borrowing Reasons/Causes for Farmers
    Long term finance - Acquisition of land

    Medium term - Especially for equipment purchase

    Short term - utilised on a seasonal basis
  7. Risks in lending to farmers
    Production risk

    Price risk

    Natural risk

    Key man risk
  8. 3 Basic Principles that guide lending decisions
    Safety of loan


    Suitability of loan
  9. International trade risk
    Foreign Exchange risk

    Transit risk

    Credit risk

    Transfer risk
  10. Cash Flow Analysis questions
    Will the expected cash receipts of a business be adequate to meet all the required payments including loan repayments?

      Has the business the financial flexibility to survive a period of adversity if the expected cash flow does not occur.
  11. Altman's Z Score
    Altman used multi discriminant analysis to distinguish between two population i.e. good borrowers and bad borrowers.

    A score is constructed using accounting ratios, then this score is measured against the benchmark.
  12. Credit Worthiness
    Credit worthiness means whether the prospective borrowers is worthy of receiving requested credit (finance).

    Assessed by 5 C's approach
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FIN320 - Exam
2017-10-23 22:42:42

FIN320 - Exam
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