CCA Core Concepts and Principles 5

Question 1

A borrower with total debt of $6 million and EBITDA of $1.5 million has what leverage multiple?

Accepted Answer

4.0x

Answer

Debt/EBITDA = $6M / $1.5M = 4.0x.

Question 2

Which factor most increases loss given default (LGD) on a secured loan?

Accepted Answer

Collateral that is specialized and difficult to resell

Answer

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?

Accepted Answer

It represents a contingent liability that could drain cash if triggered

Answer

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?

Accepted Answer

Loss of that client could severely impair cash flow

Answer

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?

Accepted Answer

Matched to or shorter than the equipment's useful life

Answer

Matching maturity to the asset's useful life ensures the asset generates cash for repayment while still productive.

CCA - Certified Credit Analyst Practice Test