CCA Core Concepts and Principles 5 — Questions and Answers
Question 1: A borrower with total debt of $6 million and EBITDA of $1.5 million has what leverage multiple?
- 2.5x
- 4.0x (Correct answer)
- 0.25x
- 9.0x
Correct answer: 4.0x
Debt/EBITDA = $6M / $1.5M = 4.0x.
Question 2: Which factor most increases loss given default (LGD) on a secured loan?
- Highly liquid collateral
- Senior lien position
- Collateral that is specialized and difficult to resell (Correct answer)
- A low loan-to-value ratio
Correct answer: Collateral that is specialized and difficult to resell
Specialized collateral has a thin resale market, lowering recoveries and raising LGD.
Question 3: Why is a company's off-balance-sheet obligation, such as a guarantee of an affiliate's debt, important to a credit analyst?
- It always improves the company's credit rating
- It only affects tax calculations
- It is excluded from all credit analysis by GAAP
- It represents a contingent liability that could drain cash if triggered (Correct answer)
Correct answer: It represents a contingent liability that could drain cash if triggered
Contingent liabilities can become actual obligations and impair repayment capacity.
Question 4: What is the main credit risk of a large customer concentration, such as one client generating 45% of revenue?
- Loss of that client could severely impair cash flow (Correct answer)
- Higher inventory turnover
- Increased fixed asset requirements
- Lower gross margins are guaranteed
Correct answer: Loss of that client could severely impair cash flow
Heavy dependence on one customer makes revenue and repayment vulnerable to that relationship.
Question 5: A term loan is used to finance a piece of equipment with a 7-year useful life. What is the most appropriate loan maturity?
- One year with annual renewal
- Matched to or shorter than the equipment's useful life (Correct answer)
- Thirty years to minimize payments
- Due on demand
Correct answer: Matched to or shorter than the equipment's useful life
Matching maturity to the asset's useful life ensures the asset generates cash for repayment while still productive.
Question 6: Which of the following best describes a 'global cash flow' analysis?
- Analysis of a company's foreign subsidiaries only
- Analysis of currency exchange exposure
- Combined cash flow of the business and its guarantors to assess total repayment capacity (Correct answer)
- Cash flow projection for a full economic cycle
Correct answer: Combined cash flow of the business and its guarantors to assess total repayment capacity
Global cash flow combines business and owner/guarantor income and obligations to gauge overall debt capacity.
Question 7: When a borrower's audited statements contain a 'going concern' qualification, what should the credit analyst conclude?
- The company is required to pay a dividend
- Collateral values have increased
- The statements are fully clean and unqualified
- The auditor has substantial doubt about the entity's ability to continue operating (Correct answer)
Correct answer: The auditor has substantial doubt about the entity's ability to continue operating
A going concern paragraph signals substantial doubt about survival over the next year, a major red flag.
CCA Core Concepts and Principles 5
A borrower with total debt of $6 million and EBITDA of $1.5 million has what leverage multiple?