Capital Structure & Debt Modeling Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Capital Structure & Debt Modeling flashcards as text
Mezzanine financing is best characterized as:
Answer: Hybrid financing subordinated to senior debt but senior to common equity
Mezzanine debt is hybrid capital sitting between senior debt and equity in the capital structure, typically featuring higher interest rates and often including equity warrants as additional compensation.
PIK (Payment-in-Kind) interest means:
Answer: Interest accrues and is added to the outstanding principal balance instead of being paid in cash
PIK interest allows borrowers to defer cash interest by adding accrued interest to the principal balance, which then accrues further interest, increasing the total amount owed at maturity.
The Altman Z-score is primarily used to:
Answer: Predict the probability of corporate bankruptcy within two years
The Altman Z-score uses five financial ratios (working capital, retained earnings, EBIT, market value of equity, and sales — each scaled by assets or liabilities) to predict bankruptcy risk.
What is a financial covenant in a loan agreement?
Answer: A contractual condition requiring the borrower to maintain specified financial ratios or metrics
A covenant is a binding condition in a loan agreement — such as maintaining a minimum DSCR or maximum leverage ratio — that protects lenders by limiting the borrower's financial risk-taking.
Net debt is calculated as:
Answer: Total debt minus cash and cash equivalents
Net debt = Total Debt − Cash and Cash Equivalents, representing the debt remaining if the company used all available cash to immediately pay down obligations.
A mandatory debt amortization requirement in a credit agreement means:
Answer: Fixed, scheduled principal repayments must be made regardless of operating cash flow
Mandatory amortization requires fixed, scheduled principal repayments on predetermined dates over the loan's life, reducing lender credit risk by steadily decreasing the outstanding balance.
What is the purpose of an excess cash flow sweep provision in a debt model?
Answer: To require the borrower to apply a portion of free cash flow above a threshold toward voluntary debt prepayment
An excess cash flow sweep provision requires the borrower to use a defined percentage of free cash flow exceeding a set threshold for voluntary debt prepayment, accelerating deleveraging beyond mandatory amortization.