If You Are a Lender Evaluating a Loan Application and You

question 39

True/False

If you are a lender evaluating a loan application and you calculate the following ratio: (EBIT + Lease payments)/[Interest + Lease payments + (Sinking Fund/(1-T))] then you are calculating a debt service ratio and it should be less than one in order to approve the loan.

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Definitions:

Uncollectible Receivables

Money owed to a company by customers that is considered unlikely to be paid and often written off as bad debts.

Allowance for Doubtful Accounts

An estimation of the amount of accounts receivable which may not be collectible, creating a reserve for potential bad debts.

Accounts Written Off

This refers to the process where businesses remove uncollectible accounts receivable from their accounting records because payment is no longer expected.

Note Dishonored

A promissory note that has not been paid by the issuer at maturity.