Capital Structure and Funding Flashcards
7 cards from real CTP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Capital Structure and Funding flashcards as text
A company faces a 'debt maturity wall' in 18 months. What is the FIRST action a treasurer should take?
Answer: Begin refinancing discussions early to avoid forced refinancing in distressed conditions
Proactive refinancing well before maturity gives the company negotiating leverage, access to better market conditions, and avoids the distress premium lenders charge near-term maturities.
Which type of equity offering results in NO new proceeds for the company?
Answer: Secondary offering by existing shareholders
A secondary offering involves existing shareholders selling their shares, so proceeds go to those sellers rather than the company, which receives no capital from the transaction.
What is the purpose of a 'cross-default' clause in a loan agreement?
Answer: To trigger a default on one debt instrument if the borrower defaults on any other debt obligation
A cross-default clause protects lenders by making a default on any debt obligation automatically trigger a default under their agreement, giving them equal standing to accelerate repayment.
In project finance, what distinguishes it from traditional corporate finance?
Answer: Debt is repaid solely from the project's cash flows and secured by project assets, with limited recourse to sponsors
Project finance is non-recourse or limited-recourse, meaning lenders rely on the project's standalone cash flows and assets for repayment rather than the sponsoring company's balance sheet.
A company's stock trades at a 40% discount to book value. What does this signal about equity issuance?
Answer: Issuing equity at below book value dilutes existing shareholders and may signal market distrust
Issuing equity below book value transfers value from existing shareholders to new investors and may be interpreted by markets as a negative signal about management's outlook.
What is the primary function of a 'debt service reserve account' (DSRA) in structured finance?
Answer: To provide a liquidity buffer ensuring debt payments can be made even during temporary cash flow shortfalls
A DSRA is typically funded with 3-6 months of debt service and held in trust, giving lenders comfort that near-term payments are secure even if project revenues temporarily decline.
Which of the following best describes the 'agency cost of equity' problem in capital structure?
Answer: Managers acting in their own interests rather than maximizing shareholder value, partly mitigated by debt obligations
Agency costs of equity arise from manager-shareholder conflicts; debt can reduce these costs by constraining managerial discretion over free cash flow and aligning incentives through default risk.