CIRA Principles & Practices 4

Question 1

Which of the following is NOT a recognized test of insolvency under U.S. law?

Accepted Answer

Market capitalization insolvency (stock price below book value)

Answer

U.S. insolvency law recognizes three tests: balance sheet, cash flow, and unreasonably small capital; stock price relative to book value is not a legal insolvency test.

Question 2

In a liquidation analysis prepared for a Chapter 11 plan, what is the primary purpose?

Accepted Answer

To demonstrate that creditors receive at least as much as they would in a Chapter 7 liquidation

Answer

The liquidation analysis satisfies the 'best interests of creditors' test under § 1129(a)(7), showing that each creditor receives at least a Chapter 7 liquidation recovery.

Question 3

A 'rights offering' in the context of a Chapter 11 plan of reorganization allows:

Accepted Answer

Certain creditors to purchase new equity in the reorganized debtor at a discount

Answer

A rights offering gives eligible creditors (often a backstopped class) the right to purchase newly issued equity in the reorganized company, often at a discount to estimated enterprise value.

Question 4

When a restructuring advisor prepares a going-concern valuation using discounted cash flow (DCF) analysis, the terminal value is most sensitive to changes in:

Accepted Answer

The weighted average cost of capital (WACC) and long-term growth rate

Answer

Terminal value, which typically represents the majority of DCF value, is highly sensitive to small changes in the discount rate (WACC) and the assumed perpetual growth rate.

Question 5

Under the CIRA Body of Knowledge, which concept describes a lender's right to receive proceeds from collateral before unsecured creditors?

Accepted Answer

Secured creditor priority

Answer

Secured creditors have a priority interest in their collateral, meaning they are paid from collateral proceeds before general unsecured creditors receive any distribution.

(CIRA) Certified Insolvency & Restructuring Advisor Practice Test

(CIRA) Certified Insolvency & Restructuring Advisor Practice Test

CIRA Principles & Practices 4