Question

Thomson is a manager at a bank. He has to decide whether to lend an amount of $10,000 to Safe Toy. He should:

a) Make the decision solely based on his intuition
b) Rely on personal preferences
c) Assess the creditworthiness of Safe Toy
d) Deny the loan without evaluating the risk

Answer 1

Thomson should carefully evaluate the creditworthiness of Safe Toy based on financial data and industry rules of thumb, rather than relying on intuition or preferences. So, option C is correct.

Step-by-step explanation:

Thomson, as a manager at a bank, should assess the creditworthiness of Safe Toy before deciding to lend the $10,000. This involves examining various financial aspects of the company, such as its credit history, cash flow, profitability, and existing debts. The decision should not be based on personal intuition, preferences, or without evaluating the risk, as those approaches do not provide an objective assessment of Safe Toy's likelihood to repay the loan. Instead, Thomson should use cognitive skills to make an informed decision and possibly apply rules of thumb that are common in the banking industry for assessing loan applications.

A well-run bank prepares for the possibility of loan defaults by factoring in expected losses into its planning. An unexpected increase in loan defaults, as might occur during a recession, can significantly impact the bank's net worth. Hence, thoroughly evaluating the risk before granting a loan to Safe Toy is crucial to mitigate potential negative impacts on the bank's financial health.