CFC Capital Structure & Funding 4

Question 1

A leveraged buyout (LBO) transaction is primarily financed by:

Accepted Answer

A combination of acquisition debt secured by the target's assets and cash flows

Answer

LBOs use significant debt (typically 60-90% of purchase price) secured by the target company's assets and future cash flows to acquire the business.

Question 2

Which covenant type in a debt agreement restricts the borrower from taking specific actions without lender consent?

Accepted Answer

Negative covenant

Answer

Negative covenants (also called restrictive covenants) prohibit borrowers from taking specific actions such as incurring additional debt or paying dividends above set limits.

Question 3

A company's interest coverage ratio falls below 1.5x as specified in its loan agreement. This most likely triggers a:

Accepted Answer

Covenant violation requiring lender waiver or amendment

Answer

When a financial covenant threshold is breached, the borrower is in technical default and must obtain a waiver or amendment from lenders to avoid acceleration of the debt.

Question 4

Under ASC 470, debt with a subjective acceleration clause that makes it callable upon a material adverse change must be classified as:

Accepted Answer

Current liability if the condition exists at the balance sheet date

Answer

ASC 470-10 requires debt with subjective acceleration clauses to be reclassified as current if conditions giving the lender the right to accelerate exist at the balance sheet date.

Question 5

A Special Purpose Vehicle (SPV) used in structured finance is designed primarily to:

Accepted Answer

Isolate financial risk and ring-fence specific assets from the sponsor

Answer

SPVs are bankruptcy-remote entities that isolate specific assets and liabilities, protecting the sponsoring entity from the SPV's risks and vice versa.

(CFC) Certified Financial Controller Practice Test

(CFC) Certified Financial Controller Practice Test

CFC Capital Structure & Funding 4