Monash University
Semester One Examination 2012
Faculty of Business and Economics
AFW3841
LENDING DECISIONS
EXAM CODE:
TITLE OF PAPER:
EXAM DURATION:
READING TIME:
3 hours writing time
10 minutes
THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)
 Berwick
 Clayton
 Peninsula
 Distance Education
 Caulfield
 Gippsland
 Sunway
 Open Learning
 Other (specify)
During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case,
mobile phone or any other material/item which has not been authorised for the exam or specifically
permitted as noted below. Any material or item on your desk, chair or person will be deemed to be
in your possession. You are reminded that possession of unauthorised materials in an exam is a
disciplinable offence under Monash Statute 4.1.
No examination papers are to be removed from the room.
AUTHORISED MATERIALS
CALCULATORS
 YES
 NO
OPEN BOOK
 YES
 NO
SPECIFICALLY PERMITTED ITEMS
 YES
 NO
if yes, item permitted is:
1. PV interest factor tables attached to the examination paper
This exam paper consists of eleven (11) questions printed on Six (6) pages. It is comprised of
two parts. Section A consists of seven compulsory questions, Section B requires 3 of 4 questions
to be attempted. PLEASE CHECK BEFORE COMMENCING. This is a FINAL paper and CLOSED
BOOK examination.
Candidates must complete this section if required to write answers within this paper
STUDENT ID
__ __ __ __ __ __ __ __
DESK NUMBER
__ __ __ __
Section A (55 marks)
The following seven (7) questions are compulsory.
DO NOT record your answers on this paper.
1.
Briefly describe the business process flow in lending.
(5 marks)
2.
Examine the differences between the judgmental and the credit scoring
approach to lending decision.
(10 marks)
3.
Discuss any five of the 6 C’s in a bank lending evaluation.
4.
The diagram below is a KMV model schematic. Name the labels A to J in the
diagram and describe the KMV model’s application to lending decision.
(5 marks)
G
C
A
H
D
I
F
J
B
E
(10 marks)
5.
Banks are constrained by information biasness in processing loan applications.
Discuss the information biases faced by a lending institution and its
implications on this institution.
(10 marks)
6.
Small businesses pose a real challenge to lenders. How is a small business
defined? Explain two main challenges faced by lenders in dealing with small
businesses.
(5 marks)
7.
The financing of International trade is compounded by what is known as
country risk. As a credit officer in an International Bank, how would country
risk be analysed.
(10 marks)
This space has been left blank
Section B (45 marks)
Answer any three (3) of the following four (4) questions (15 marks each).
DO NOT record your answers on this paper.
BodhiDharman Company dealing in computer service has approached XinHua Bank
for a loan. The following are their Income Statement and Balance Sheet for the year
ending 31-12-2011.
Income Statement 31-12-2011
INCOME
Sales
Less: Sales return
Net sales
Cost of sales
Gross profit
EXPENSES
Selling and distribution
Advertising
Vehicle rent
Sales and staff salaries
$
$
509,020
8,700
500,320
202,400
297,920
12,300
42,000
61500
115,800
Administrative expenses
Insurance
Administrative wages
Depreciation expense furniture & Fitting
Depreciation of buildings
Finance expenses
Interest expense on overdrafts
Interest expense on mortgage
Total expenses
PROFIT BEFORE INCOME TAX
Income tax expense
PROFIT
3,000
70,620
12,700
50,000
136,320
11,300
4,500
15,800
267,920
30,000
9,000
21,000
BALANCE SHEET
As at 31-12-2011
CURRENT ASSETS
Cash at bank
Accounts receivables
7,500
210,700
Inventory
Prepaid rent
Total current assets
NON-CURRENT ASSETS
Government bonds
Land
Buildings
Accumulated depreciation
Office furniture & fittings
Accumulated depreciation
TOTAL NON-CURRENT ASSETS
TOTAL ASSETS
CURRENT LIABILITIES
Bank overdraft
Accounts payable
GST payable
Wages & salaries payable
Current tax liability
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Mortgage payable
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
NET ASSETS
EQUITY
Share capital
1,144,000 ordinary shares at $1
General reserve
Retained earnings
TOTAL EQUITY
Note: The shares of this company are trading at
$2.50/share in the share market.
106,000
30,000
354,200
180,000
230,000
1,000,000
(150,000)
127,000
(35,000)
850,000
91,300
1,351,300
1,705,500
178,050
118,900
15,000
3,500
9,000
324,450
90,000
90,000
414,450
1,291,050
1,144,000
23,000
124,050
1,291,050
For Question 1 and 2 of this section please refer to the Income Statement and Balance
Sheet of BodhiDharman Company as at 31-12-2011.
1.
Analyse the Income Statement and Balance Sheet of BodhiDharman Company
as at 31-12-2011 for its financial performance. Compute the liquidity ratios,
profitability ratios, efficiency ratios and leverage ratios and interpretate the
ratios.
Provide
at
least
two
ratios
for
each
category.
(15 marks)
2.
Examine the Income Statement and Balance Sheet of BodhiDharman Company
as at 31-12-2011 and calculate the Altman Z score for failure prediction from
the relationship given below. Comment on the score obtained.
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
(15 marks)
3.
What is the loan balance on a $300,000 loan after 10 years with an original
term of 30 years, an interest rate of 8% p.a. and with monthly payments? How
much interest would be paid, if paid over the full term?
(15 marks)
4.
Associated Finance is entering into lease arrangement with Earthmovers and
would like to estimate its lease rentals. Asset costs $1,000,000, can be
depreciated over five years, depreciation will be straight-line with no salvage,
estimated actual residual value at the end of five years is $200,000, lessor’s tax
rate is 30 percent, after-tax returns on loans with equivalent risk is 10 %, asset
will be leased for four years.
(15 marks)
END OF EXAMINATION