CTP CTP Cash Flow Management & Liquidity 2 — Questions and Answers
Question 1: A CTP professional reviews a company's borrowing base certificate. What is the primary purpose of this document?
- To determine how much the company can draw on its asset-based lending facility (Correct answer)
- To calculate quarterly tax obligations
- To report GAAP earnings to creditors
- To certify payroll compliance
Correct answer: To determine how much the company can draw on its asset-based lending facility
A borrowing base certificate calculates the eligible collateral (receivables, inventory) that supports the maximum draw amount under an asset-based lending (ABL) facility.
Question 2: Which metric best signals that a company's liquidity is critically impaired?
- Current ratio falling below 1.0 (Correct answer)
- Gross margin declining 2%
- Capital expenditures exceeding depreciation
- Debt-to-equity ratio above 2.0
Correct answer: Current ratio falling below 1.0
A current ratio below 1.0 means current liabilities exceed current assets, indicating the company may be unable to meet near-term obligations with available resources.
Question 3: In a turnaround, what is 'liquidity runway'?
- The estimated number of weeks or months a company can operate before exhausting available cash (Correct answer)
- The time needed to complete a Chapter 11 filing
- The period between loan origination and first payment due
- The duration of an interim management engagement
Correct answer: The estimated number of weeks or months a company can operate before exhausting available cash
Liquidity runway quantifies how long the company can sustain operations given current cash burn and available resources, guiding the urgency of restructuring actions.
Question 4: A distressed retailer has significant inventory but limited cash. Which strategy best addresses this imbalance?
- Running inventory liquidation sales to accelerate conversion to cash (Correct answer)
- Ordering additional inventory to improve vendor relationships
- Delaying all payments including payroll
- Issuing new equity immediately
Correct answer: Running inventory liquidation sales to accelerate conversion to cash
Liquidating excess or slow-moving inventory converts a non-cash asset into cash, directly improving liquidity in the short term.
Question 5: What is the purpose of a 'springing cash dominion' clause in a credit agreement?
- It gives the lender control over the company's cash accounts when availability drops below a specified threshold (Correct answer)
- It allows the borrower to draw additional funds during emergencies
- It requires the company to maintain a minimum cash balance at all times
- It restricts the lender from calling the loan for 90 days
Correct answer: It gives the lender control over the company's cash accounts when availability drops below a specified threshold
Springing cash dominion activates lender control over cash sweeps and disbursements once the borrower's available credit falls below a trigger level, tightening lender oversight.
Question 6: Why is EBITDA an insufficient measure of liquidity for a distressed company?
- EBITDA excludes cash interest, taxes, working capital changes, and capex that directly affect actual cash availability (Correct answer)
- EBITDA overstates depreciation charges
- EBITDA is not recognized under US GAAP
- EBITDA includes non-operating income items
Correct answer: EBITDA excludes cash interest, taxes, working capital changes, and capex that directly affect actual cash availability
EBITDA is an earnings proxy, not a cash measure — it ignores mandatory cash outflows like debt service, tax payments, and working capital swings that are critical in distress.
CTP CTP Cash Flow Management & Liquidity 2
A CTP professional reviews a company's borrowing base certificate.
What is the primary purpose of this document?