CIRA Financial Analysis & Reporting 5 — Questions and Answers
Question 1: The reorganization value of a reorganized entity under fresh-start reporting is most analogous to:
- Book value of predecessor equity
- Enterprise value as agreed upon in the plan of reorganization (Correct answer)
- Forced liquidation value of all assets
- Tax basis of assets at the petition date
Correct answer: Enterprise value as agreed upon in the plan of reorganization
Reorganization value represents the enterprise value of the reorganized entity as determined through the plan of reorganization process, typically based on DCF or comparable company analysis.
Question 2: When a CIRA analyst prepares a recovery analysis, which factor most directly reduces secured creditor recovery?
- High administrative and professional fee claims that prime the lien (Correct answer)
- Large general unsecured creditor pool
- Strong EBITDA performance post-emergence
- Equity holders retaining a small percentage interest
Correct answer: High administrative and professional fee claims that prime the lien
Administrative and professional fee claims have superpriority over secured claims in some circumstances and reduce the collateral pool available to secured creditors.
Question 3: Which of the following best describes 'enterprise value' in a restructuring context?
- The market capitalization of the debtor's equity
- The total value of the business available to all capital providers, before deducting net debt (Correct answer)
- The liquidation value of assets minus secured debt
- The book value of assets on the petition date
Correct answer: The total value of the business available to all capital providers, before deducting net debt
Enterprise value represents the total value of the business to all capital providers (debt and equity), calculated before subtracting net debt to arrive at equity value.
Question 4: A distressed company reports negative working capital. This is MOST concerning when combined with:
- Strong operating cash inflows and ample revolving credit availability
- Positive net income from non-recurring asset sales
- Accelerating maturity of current debt with no refinancing source (Correct answer)
- Recent equity issuance that increased cash balances
Correct answer: Accelerating maturity of current debt with no refinancing source
Negative working capital becomes critical when current debt is maturing without a refinancing source, creating an imminent liquidity crisis that cannot be offset by operations.
Question 5: Under a Chapter 11 plan, 'cramdown' allows the court to confirm a plan over the objection of a dissenting class if:
- Every class of claims votes in favor of the plan
- The plan is fair and equitable and does not unfairly discriminate (Correct answer)
- All administrative claims have been paid in cash
- The debtor has positive equity on a fresh-start basis
Correct answer: The plan is fair and equitable and does not unfairly discriminate
Cramdown confirmation requires the plan to be fair and equitable to the objecting class and not unfairly discriminate against it, satisfying the requirements of Section 1129(b).
Question 6: In comparing a debtor's projected cash flows to its 13-week budget, a 'variance analysis' is valuable primarily because it:
- Determines the reorganization value of the estate
- Identifies operational or collection issues early so management can adjust (Correct answer)
- Sets the interest rate on DIP financing
- Calculates the allowed amount of general unsecured claims
Correct answer: Identifies operational or collection issues early so management can adjust
Variance analysis compares actuals to projections to flag emerging cash shortfalls or collections problems, enabling timely corrective action during restructuring.
Question 7: Which of the following would increase a distressed company's net realizable value (NRV) of accounts receivable?
- Increasing the allowance for doubtful accounts
- Accelerating collection efforts and reducing aged receivables (Correct answer)
- Extending customer payment terms
- Writing off additional receivables as uncollectible
Correct answer: Accelerating collection efforts and reducing aged receivables
Collecting aged receivables faster reduces the reserve needed and increases the NRV of the accounts receivable balance.
CIRA Financial Analysis & Reporting 5
The reorganization value of a reorganized entity under fresh-start reporting is most analogous to: