CIRA CIRA Valuation Methods & Asset Assessment 2 — Questions and Answers
Question 1: Which EBITDA multiple adjustment is most appropriate when valuing a distressed company relative to a healthy peer group?
- Apply a discount to reflect higher risk, illiquidity, and uncertainty (Correct answer)
- Apply a premium to reflect unique turnaround upside
- Use the same multiple without adjustment
- Double the peer multiple to account for financial complexity
Correct answer: Apply a discount to reflect higher risk, illiquidity, and uncertainty
Distressed companies carry elevated execution risk and uncertainty, warranting a downward adjustment to peer multiples used in the market approach.
Question 2: In a Chapter 11 reorganization, the 'best interests of creditors' test requires that:
- Each dissenting creditor receives at least as much as they would in a Chapter 7 liquidation (Correct answer)
- All creditors vote unanimously in favor of the plan
- The debtor pays 100 cents on the dollar to all unsecured creditors
- Only secured creditors must be fully compensated
Correct answer: Each dissenting creditor receives at least as much as they would in a Chapter 7 liquidation
The best interests test ensures that no creditor is worse off under the reorganization plan than they would be if the debtor's assets were liquidated under Chapter 7.
Question 3: When a CIRA uses the 'net realizable value' (NRV) method for inventory in distress, which adjustment is most common?
- Reduce book value to reflect expected selling price less costs to complete and sell (Correct answer)
- Increase book value by the historical inflation rate
- Use replacement cost as the primary measure
- Ignore slow-moving inventory in the analysis
Correct answer: Reduce book value to reflect expected selling price less costs to complete and sell
NRV reflects the amount the distressed company can expect to actually receive from selling inventory after accounting for any additional costs needed to make the sale.
Question 4: Which concept describes the minimum value a reorganization plan must provide to a class of creditors in order to cram down a dissenting class?
- Absolute priority rule compliance ensuring full payment or no junior recovery (Correct answer)
- Fair and equitable treatment meaning at least liquidation value
- Pro-rata distribution across all classes simultaneously
- Market-rate interest on all outstanding balances
Correct answer: Absolute priority rule compliance ensuring full payment or no junior recovery
Under cramdown, a plan is fair and equitable to a dissenting class only if senior classes are paid in full before junior classes receive any distribution, per the absolute priority rule.
Question 5: A CIRA professional analyzing real property in a distressed portfolio would primarily use which valuation method?
- Sales comparison approach using recent comparable transactions (Correct answer)
- Discounted cash flow only
- Historical cost minus accumulated depreciation
- Replacement cost without any market adjustment
Correct answer: Sales comparison approach using recent comparable transactions
The sales comparison approach benchmarks the property against recent sales of similar properties, providing the most market-relevant estimate of current value.
Question 6: Which metric is most commonly used to assess a distressed company's ability to service its debt from operations?
- Debt Service Coverage Ratio (DSCR) (Correct answer)
- Price-to-Earnings ratio
- Return on Equity
- Days Sales Outstanding
Correct answer: Debt Service Coverage Ratio (DSCR)
DSCR measures whether operating cash flow is sufficient to cover scheduled debt principal and interest payments, making it the primary debt serviceability metric.
CIRA CIRA Valuation Methods & Asset Assessment 2
Which EBITDA multiple adjustment is most appropriate when valuing a distressed company relative to a healthy peer group?