CIRA Financial Analysis & Reporting 4

Question 1

The 'absolute priority rule' in bankruptcy governs:

Accepted Answer

The sequence in which creditor classes are paid under a reorganization plan

Answer

The absolute priority rule requires that senior classes be paid in full before junior classes receive any recovery under a Chapter 11 plan.

Question 2

When calculating free cash flow to the firm (FCFF) for a distressed company, which item must be ADDED BACK to net income?

Accepted Answer

Depreciation and amortization

Answer

Depreciation and amortization are non-cash charges that reduce net income but do not reduce cash, so they must be added back when computing FCFF.

Question 3

An EBITDA margin analysis for a distressed retailer shows margins declining from 12% to 4% over three years. The MOST likely cause consistent with financial distress is:

Accepted Answer

Rising fixed costs against declining or stagnant revenues

Answer

Margin compression in distress typically results from fixed costs remaining constant or growing while revenues decline, squeezing profitability.

Question 4

Which of the following items would appear in the 'reorganization items' section of an income statement prepared under ASC 852?

Accepted Answer

Interest expense on pre-petition debt accrued post-petition

Answer

Post-petition interest on pre-petition debt that is disclosed but not necessarily accrued, and adjustments arising from bankruptcy, are classified as reorganization items under ASC 852.

Question 5

In a liquidation analysis, 'forced liquidation value' differs from 'orderly liquidation value' primarily because:

Accepted Answer

Forced liquidation typically produces lower recoveries due to time pressure

Answer

Forced liquidation compresses the sale timeline, limiting buyer pool and negotiating leverage, which generally results in lower recovery rates than an orderly process.

(CIRA) Certified Insolvency & Restructuring Advisor Practice Test

(CIRA) Certified Insolvency & Restructuring Advisor Practice Test

CIRA Financial Analysis & Reporting 4