INSTITUTE OF BANKERS IN MALAWI

DIPLOMA IN BANKING EXAMINATION

SUBJECT: CREDIT RISK ASSESSMENT 1 (IOBM –D204)

Date: 8th May 2016

Time Allocated: 3 hours (13:30 – 16:30 Hours)

INSTRUCTIONS TO CANDIDATES

1 This paper consists of TWO Sections, A and B.

2 Section A consists of 4 questions, each question carries 15 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks. Answer

ANY TWO questions.

4 You will be allowed 10 minutes to go through the paper before the start of the
examination, you may write on this paper but not in the answer book.

5 Begin each answer on a new page.

6 Please write your examination number on each answer book used.

Answer books without examination numbers will not be marked.

7 All persons writing examinations without payment will risk expulsion from the
Institute.

8 If you are caught cheating, you will be automatically disqualified in all subjects
seated this semester.

9 DO NOT open this question paper until instructed to do so.

 SECTION A (60 MARKS)

Answer ALL questions from this section.

QUESTION 1

BALANCE SHEET INCOME STATEMENT

ASSETS
Non - Current Assets Revenue 17,500.00
Property, Plant and Equipment 5,170.00 Cost of Sales (14,600.00)
Goodwill 120.00 Gross Profit 2,900.00
Investment in Associates 60.00
5,350.00 Distribution Costs (1,870.00)
Current Assets Administrative Costs (490.00)
Inventories 2,650.00 Finance Costs - Interest Payable (148.00)
Trade Receivables 2,400.00 Other Income 8.00
Cash and Cash Equivalents 140.00 Profit Before Tax 400.00
5,190.00 Income Tax Expense (160.00)
Total Assets 10,540.00 Profit For the Year 240.00

EQUITY AND LIABILITIES

Equity
Share Capital 400.00
Other Reserves 320.00
Retained Earnings 1,250.00
1,970.00
Non-Current Liabilities
Long Term Borrowing 3,100.00
Deferred Tax 400.00
3,500.00
Current Liabilities
Trade payables 4,700.00
Interest Payable 370.00
5,070.00
Total Liabilities 8,570.00

Total Liabilities and Equity 10,540.00

From the given information, calculate the following:

2

A qualification examined by the Institute of Bankers in Malawi

 a. Current Ratio
b. Quick Ratio
c. Gross profit Margin
d. Net Profit Margin
e. Return on Assets
f. Return on Equity
g. Equity Ratio
h. Debt Ratio
i. Net Current Assets
j. Interest Cover
(Total 20 marks)

QUESTION 2

a) In the conduct of an applicant’s credit application, a Credit Analyst has observed

that the financial statements submitted for the credit application have a qualified
audit report. Distinguish between a qualified and an unqualified audit report.
Further outline how this observation will have an impact on the credit
assessment. (7
marks)

b) Outline and discuss the contents of the three key financial statements.
(8 marks)
(Total 15 marks)

QUESTION 3

a) What are the two main aspects that a trading company like Shoprite stores
consider in working capital management? (5 marks)

b) List five sources of working capital and discuss how they impact working capital
Management. (10 marks)
(Total 15 marks)

QUESTION 4

A qualification examined by the Institute of Bankers in Malawi

Define and calculate Operating Cycle and Cash Cycle for a company with the
following balance sheet structure:

- Creditors 1,789
- Purchases 13,890
- Debtors 5,345
- Sales 17,654
- Cost of Sales 9,123
- Closing Stock 793
(Total 15 marks)

SECTION B (40 MARKS)

Answer ANY TWO questions from this section

QUESTION 5

a) With a use of a well labelled diagram Distinguish between fixed and variable
costs; (10 marks)

b) Briefly explain five weaknesses and limitations of breakeven analysis. (10 marks)
(Total 20 marks)

QUESTION 6

a) Discuss the rationale for considering business and financial risks in assessing the
appropriateness and fitness of an application for a credit facility. The discussion
should include impact on profitability, capacity to repay, survivability of an
application, highlighting which kind of cost has more impact on either business
risk or financial risk. (10
marks)

b) Discuss three critical factors that are necessary for the success of a business.

(10 marks)
(Total 20 marks)

A qualification examined by the Institute of Bankers in Malawi

QUESTION 7

The following information was available for Company X.

a) Degree of Operating Leverage
b) Degree of Financial Leverage
c) Degree of Combined Leverage

Total Sales 85,000 units @ MK45.0 per unit

Variable Costs 45 percent of sales
Fixed costs MK 890,000
Loan MK5.0 million @ base plus 100 basis points. Bank rate is
15.0 percent (base rate is 200 basis points above Bank
rate)
Marginal Tax Rate 35 percent (Total 20 marks)

Required
Calculate and discuss the answer in each of the above.
Hint: Clearly showing all formulae and workings.

QUESTION 8

The De La Rey Model of financial risk measures the likelihood of a business failing
due to financial risk. According to the model:

K= 0.01622 ( a ) + 0.111 ( b ) + 0.0529 ( c ) + 0.076 ( d ) + 0.017 ( e ) + 0.01071 ( f )

– 0.06881

Required

A qualification examined by the Institute of Bankers in Malawi

a) For a business with the following parameter measures, calculate its K value and
compare its likelihood of failure with another business with a K value of 0.107.
Stock / Inflation Adjusted Total Assets = 0.2203
Income after Tax / Ave. Total Assets = 0.0389
EBIT / Average Total Assets = 0.0654
(Current Assets + Listed Inv) / Current Liab. = 1.2004
Cashflow after Tax / Average Total Assets = 0.1234
Total Debt / Total Assets = 0.7616
(12
marks)
b) Briefly compare four areas of difference between registered companies and
partnerships. (8 marks)
(Total 20 marks)

END OF THE EXAMINATION PAPER

A qualification examined by the Institute of Bankers in Malawi