CFM Capital Structure & Debt Modeling 3

Question 1

Mezzanine financing is best characterized as:

Accepted Answer

Hybrid financing subordinated to senior debt but senior to common equity

Answer

Pure equity with no debt-like features or fixed obligations

Answer

Senior secured bank debt with the lowest cost in the capital stack

Answer

A government-backed loan program designed for small businesses

Question 2

PIK (Payment-in-Kind) interest means:

Accepted Answer

Interest accrues and is added to the outstanding principal balance instead of being paid in cash

Answer

Interest is paid in cash on each scheduled coupon date

Answer

The borrower compensates the lender using company stock at each period

Answer

Interest payments are deferred until maturity without compounding

Question 3

The Altman Z-score is primarily used to:

Accepted Answer

Predict the probability of corporate bankruptcy within two years

Answer

Estimate a company's fair market equity value using comparable multiples

Answer

Calculate the theoretically optimal debt-to-equity ratio for a firm

Answer

Measure the return on invested capital relative to the cost of capital

Question 4

What is a financial covenant in a loan agreement?

Accepted Answer

A contractual condition requiring the borrower to maintain specified financial ratios or metrics

Answer

A third-party guarantee covering the borrower's obligations if they default

Answer

An option granting the lender the right to convert debt into equity

Answer

A prepayment penalty fee charged when the borrower retires debt early

Question 5

Net debt is calculated as:

Accepted Answer

Total debt minus cash and cash equivalents

Answer

Total debt minus total shareholders' equity

Answer

Long-term debt minus current portion of long-term debt

Answer

Total liabilities minus total assets on the balance sheet

Question 6

A mandatory debt amortization requirement in a credit agreement means:

Accepted Answer

Fixed, scheduled principal repayments must be made regardless of operating cash flow

Answer

The company must pay 100% of excess free cash flow to equity holders quarterly

Answer

The lender must provide additional capital whenever the borrower's cash falls below a threshold

Answer

The borrower must convert a portion of debt into equity at each anniversary date

Question 7

What is the purpose of an excess cash flow sweep provision in a debt model?

Accepted Answer

To require the borrower to apply a portion of free cash flow above a threshold toward voluntary debt prepayment

Answer

To direct all operating cash flows into the revolving credit facility each period

Answer

To automatically reinvest excess operating cash flows into approved capital expenditures

Answer

To pool cash from subsidiary accounts into a centralized parent company treasury