Part II 10 marks Match elements and answer the questions below. up the following

Question

Part II 10 marks Match elements and answer the questions below. up the following credit management elements to the underlying reasons for these #1 #2 #3 Match Underlying Reason to Element by inserting the corresponding number Element 1. Credit Rating Willingness to pay 2. Collateral 3. Character 4. Capital Underlying Reason from Column #1 Owner contribution Ability to pay Impact of the business cycle on payments Restrictions on the entity Security for payments Quality of likely payments 5. Capacity 6. Covenants 7. Conditions Which of the elements is related to ratio analysis? Can the elements be used to assess debt and equity investments? Yes or No and support your answer briefly. Explain how character and conditions can affect a decision to lend money.

Explanation / Answer

A)  

B) Credit rating element is related to ratio analysis as in this process we analyze the financial statement of an entity using various financial ratios and provide detailed report on credit worthiness of an entity.

C) Capital is used to asssess the debt and equity investment. Before introducing capital in the business a proper analysis is to be done that which source is to be use to introduce new capital so that there is less cost of capital with minimum risk.

D) Character stands for mental and moral qualities of a person so if moral qualities are low of person to whom we have lended the money than there are chances to loose the money.

Conditions stands for circumstances or factors affecting the decision so is there is any condition which is against the lender or affect the business to whom we are lending the money than there are chances to loose the money which we have lended if conditions are not satisfied or satisfied (as the case may be).

Underlying reason Element No Element Willingness to pay 3 Character Owner contribution 4 Capital Ability to pay 5 Capacity Impact of business cycle on payments 7 Conditions Restrictions on entity 6 Covenants Security for payment 2 Collateral Quality of likely payments 1 Credit rating

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