TMA Cash Flow Management 3

Question 1

What is the difference between 'free cash flow' (FCF) and 'operating cash flow' (OCF) in the context of distressed company analysis?

Accepted Answer

OCF is cash generated from operations; FCF deducts capital expenditures to show cash available after maintaining or growing the asset base

Answer

FCF and OCF are interchangeable terms in turnaround analysis

Answer

FCF includes financing activities while OCF excludes them

Answer

OCF is a forward-looking metric while FCF is historical

Question 2

What is a 'sale-leaseback' transaction and how does it generate liquidity for a distressed company?

Accepted Answer

A company sells a fixed asset to a buyer and simultaneously enters a lease to continue using the asset, receiving immediate cash proceeds

Answer

A company sells accounts receivable and leases them back from a factor

Answer

A company leases an asset before purchasing it, deferring the cash outflow

Answer

A company transfers its lease obligations to a third party to reduce fixed costs

Question 3

What does 'Days Payable Outstanding (DPO)' measure, and what does a high DPO indicate?

Accepted Answer

The average days a company takes to pay its suppliers; a high DPO means the company is retaining cash longer

Answer

The average days to collect receivables; a high DPO means customers pay slowly

Answer

The average days to sell inventory; a high DPO signals slow-moving stock

Answer

The number of days outstanding on overdue debt covenants

Question 4

What is a 'forbearance agreement' in the context of a distressed company's relationship with its lenders?

Accepted Answer

An agreement in which lenders agree not to exercise remedies on a defaulted loan for a specified period, allowing time for restructuring

Answer

A legal document in which the company agrees to pay lenders above-market interest as a penalty for default

Answer

A contract requiring the company to sell assets within 90 days to repay lenders

Answer

A court order preventing lenders from contacting the debtor during bankruptcy proceedings

Question 5

What is the 'cash conversion cycle' (CCC) and why is minimizing it a priority in a turnaround?

Accepted Answer

The number of days between a company's cash payment for inventory and the receipt of cash from customers; minimizing it frees up working capital

Answer

The time required to convert fixed assets into cash through depreciation; minimizing it reduces asset write-downs

Answer

The frequency with which a company converts its revolving credit facility; minimizing it reduces interest costs

Answer

The time needed to convert accounts payable into equity; minimizing it improves leverage ratios

Question 6

In a distressed M&A or bankruptcy context, what is a 'stalking horse' bid?

Accepted Answer

An initial, court-approved offer for a debtor's assets that sets a minimum price floor for subsequent auction bidding

Answer

An anonymous bid submitted by a competitor to learn the seller's reserve price

Answer

A lender's credit bid equal to the face value of its secured debt

Answer

A management buyout proposal presented before a formal sale process begins

Question 7

Which of the following best describes 'negative working capital' and when it can be a sign of financial strength rather than distress?

Accepted Answer

Negative working capital occurs when current liabilities exceed current assets; it can be a strength in businesses that collect cash before paying suppliers, such as large retailers

Answer

Negative working capital always indicates insolvency and is a sign of financial distress

Answer

Negative working capital is a temporary condition caused solely by seasonal fluctuations in inventory

Answer

Negative working capital means a company has no outstanding debt obligations in the current period