Dimension 3 55-70

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Which type of debt is usually secured by a first lien on current assets and a first or second lien on fixed assets?

Senior revolving debt (correct)

Subordinated debt

Senior bank's debt

Senior term debt

In what type of financing may a borrower raise capital in the private placement market for periods of 7 to 10 years with delayed, balloon, or bullet maturities?

Commercial paper financing

Subordinated debt (correct)

Senior term debt

Senior revolving debt

What type of companies usually have senior term debt secured by a first lien on fixed assets or a first or second lien on current assets?

Large corporations

Family-owned businesses

Middle market or small companies (correct)

Startups

Which type of debt can have characteristics of subordinated debt even though it is not legally subordinated?

Senior term debt Signup and view all the answers

What is the typical entity providing senior revolving debt or senior term debt?

Commercial banks or similar financial institutions Signup and view all the answers

What is usually pledged as collateral in acquisition financing associated with senior revolving debt?

Accounts receivable and inventory Signup and view all the answers

When does the repayment of some senior term debts typically occur?

After expiration of bank debt Signup and view all the answers

What is the primary objective from the senior banks' perspective regarding the cash flows of the borrowing company?

Service and repay senior bank's debt first Signup and view all the answers

What is the primary purpose of liquidity ratios?

Measure the company's ability to convert current assets to cash Signup and view all the answers

What do liquidity ratios NOT indicate?

Appropriateness of asset/liability levels Signup and view all the answers

Which ratio is also known as the acid-test ratio?

Quick ratio Signup and view all the answers

In the quick ratio, what does a value greater than 1.0 indicate?

Current liabilities covered by quick assets Signup and view all the answers

Why are liquidity ratios considered essential for historical and external comparisons?

Measure extent of current assets to meet obligations Signup and view all the answers

What is a key expectation regarding the current ratio and quick ratio over time?

Expected to improve or remain stable due to financing sources Signup and view all the answers

How do liquidity ratios differ from solvency ratios in assessing a company's financial health?

Liquidity ratios focus on short-term obligations, while solvency ratios focus on long-term obligations Signup and view all the answers

Why are liquidity ratios based on accrual accounting seen as a limitation?

'Quick assets' are not accurately represented Signup and view all the answers

What is the primary purpose of maintaining a satisfactory credit rating, according to the text?

To preserve the company's access to future debt and maintain financial flexibility Signup and view all the answers

Which of the following is NOT mentioned as a priority for capital structure management, according to the text?

Maximizing the company's profitability Signup and view all the answers

Which of the following is a potential downside of issuing additional equity or subordinated debt in a closely held company?

It may impair the company's flexibility in the future, such as the potential cash flow drain to liquidate preferred shareholders' rights to cumulative dividends. Signup and view all the answers

What is the primary purpose of conducting a ratio analysis, according to the text?

To provide a comprehensive picture of the company's balance sheet and how the various accounts interrelate to produce cash flow Signup and view all the answers

Which of the following is a potential downside of using ratios in credit risk analysis?

Ratios do not take into consideration any qualitative evaluation of the numbers. Signup and view all the answers

What is the primary purpose of analyzing changes in a customer's capital structure, according to the text?

To assess the company's continued ability to service and repay bank debt from cash flow Signup and view all the answers

Which of the following is a key consideration when analyzing the balance sheet accounts?

The company's ability to convert its current assets to cover its current liabilities Signup and view all the answers

Which of the following is the MAIN distinction between common and preferred stock mentioned in the text?

Preferred shareholders have the right to cumulative dividends, unlike common shareholders. Signup and view all the answers

According to the passage, what is the main reason lenders commonly adjust net worth to exclude intangible assets?

To measure the tangible book value of the company and identify the portion of equity that may be realizable in liquidation. Signup and view all the answers

Which of the following is an example of an intangible asset that may have separable value beyond its balance sheet value, according to the text?

Customer contracts Signup and view all the answers

What is the primary reason the text suggests that the value of an intangible asset like a patent or trade name can be determined through a discounted cash flow approach?

The balance sheet value of such assets only includes the capitalized legal costs, not the full development expenses. Signup and view all the answers

According to the passage, which of the following is a characteristic of intangible assets that may have separable value beyond their balance sheet values?

They are being amortized on the company's balance sheet. Signup and view all the answers

The passage suggests that in a management buyout of a public company, the equity holders are a combination of which two groups?

Management and institutional investors Signup and view all the answers

According to the passage, which of the following is a key reason why the conventional wisdom has long suggested that a company's net worth comprised of tangible assets is preferable to one with significant intangible assets?

Tangible assets provide more collateral value in a distressed liquidation. Signup and view all the answers

Which of the following statements about the value of intangible assets in a distressed liquidation is supported by the passage?

Intangible assets often have little realizable value in a liquidation, despite their accounting values. Signup and view all the answers

What is the primary objective of the principal provisions in subordinated debt?

To protect and preserve the rights of the senior bank to the company's cash flow for servicing and repaying its own senior debt Signup and view all the answers

Which statement about subordinated debt is true?

Its usual providers are insurance companies, pension and investment funds, or other long-term investors Signup and view all the answers

What is the potential advantage of seller preferred stock over subordinated debt from the company's perspective?

Preferred stock is regarded as equity for regulatory reasons and as a part of the company's permanent equity capital Signup and view all the answers

Which of the following is NOT a principal provision of subordinated debt?

The subordinated bank has the right to accelerate the loan in case of an event of default Signup and view all the answers

What term is used to refer to subordinated debt that has warrants or convertible features?

Both A and B Signup and view all the answers

What is the potential disadvantage of seller preferred stock from the company's perspective, as mentioned in the text?

Dividends on preferred stock are not tax-deductible when the company is profitable Signup and view all the answers

What is sellers' subordinated debt?

A type of debt where the seller of the company takes back a note that is subordinated to the senior bank debt Signup and view all the answers

Which statement about common or preferred stock is true?

In the case of a private company, shareholders are usually individuals or managers Signup and view all the answers