41. Which of the following choices properly ranks in ASCENDING order (from short

Question

41. Which of the following choices properly ranks in ASCENDING order (from shortest maturity to longest maturity) the debt instruments in the capital structure of a Leverage (2 points) Buyout Transaction? a. Revolver Senior Sub Notes Senior Notes b. Senior Notes Revolver c. Revolver Term Loan B d. Term Loan B Revolver Senior Sub Notes Senior Notes Senior Sub Notes Term Loan B Term Loan B Senior Sub Notes Senior Notes 42. The tenor (ie, length of time to maturity) of a bridge loan is typically: (2 points) a. 1 year b. 3 years c. 5 years d. 10 years 43. Which of the following are typical uses of a Revolving Credit Facility? CIRCLE ALL THAT APPLY (2 points) a. Maintenance capital expenditures b. Funding a portion of the LBO Purchase Price c. Working capital d. Long-term capital investment in Property, Plant & Equipment 44. Which of the following is a WEAKNESS of a dividend recapitalization? (2 points) a. b. c. d. Less sponsor equity post-transaction Transaction adds leverage to the capital structure Transaction provides a cash return to the sponsor Sponsor retains existing equity ownership 45. The projection period of an LBO model for a potential debt provider is typically how mamy years? (2 points) a. 1-2 years b. 3-4 years c. 7-10 years d. 12-15 years BFIN 7225 - Final Exam - Fall 2017 20171030.docx Page 9 of 10

Explanation / Answer

41. C. Revolver. Term Loan. Senior Notes. Senior Sub notes.

Explaination:

Revolving Credit Facility ("Revolver")

A revolver is a form of senior bank debt that acts like a credit card for companies and is generally used to help fund a company's working capital needs. A company will "draw down" the revolver up to the credit limit when it needs cash, and repays the revolver when excess cash is available (there is no repayment penalty). The revolver offers companies flexibility with respect to their capital needs, allowing companies access to cash without having to seek additional debt or equity financing.

There are two costs associated with revolving lines of credit: the interest rate charged on the revolver's drawn balance, and an undrawn commitment fee. The interest rate charged on the revolver balance is usually LIBOR plus a premium that depends on the credit characteristics of the borrowing company. The undrawn commitment fee compensates the bank for committing to lend up to the revolver's limit, and is usually calculated as a fixed rate multiplied by the difference between the revolver's limit and any drawn amount.

Bank Debt

Bank debt is a lower cost-of-capital (lower interest rates) security than subordinated debt, but it has more onerous covenants and limitations. Bank debt typically requires full amortization (payback) over a 5- to 8-year period. Covenants generally restrict a company's flexibility to make further acquisitions, raise additional debt, and make payments (e.g. dividends) to equity holders. Bank debt also has financial maintenance covenants, which are quarterly performance tests, and is generally secured by the assets of the borrower. Existing bank debt of a target must typically be refinanced with new bank debt due to change-of-control covenants.

Bank debt, other than revolving credit facilities, generally takes two forms:

Term Loan A – This layer of debt is typically amortized evenly over 5 to 7 years.

Term Loan B – This layer of debt usually involves nominal amortization (repayment) over 5 to 8 years, with a large bullet payment in the last year. Term Loan B allows borrowers to defer repayment of a large portion of the loan, but is more costly to borrowers than Term Loan A.

The interest rate charged on bank debt is often a floating rate equal to LIBOR plus (or minus) some premium (or discount), depending on the credit characteristics of the borrower. Depending on the credit terms, bank debt may or may not be repaid early without penalty.

High-Yield Debt ("Subordinated Notes", "Junk Bonds")

High-yield debt is typically unsecured. High-yield debt is so named because of its characteristic high interest rate (or large discount to par) that compensates investors for their risk in holding such debt. This layer of debt is often necessary to increase leverage levels beyond that which banks and other senior investors are willing to provide, and will likely be refinanced when the borrower can raise new debt more cheaply. Subordinated debt may be raised in the public bond market or the private institutional market, carries a bullet repayment with no amortization, and usually has a maturity of 8 to 10 years.

A company retains greater financial and operating flexibility with high-yield debt through incurrence, as opposed to maintenance, covenants and a bullet (all-at-once) repayment of the debt at maturity. Additionally, early payment options typically exist (usually after about 4 and 5 years for 7- and 10-year high-yield securities, respectively), but require repayment at a premium to face value. Interest rates for these securities are higher than they are for bank debt.

42. 2. 3 years

Bridge loan. A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing

43. C. Working capital

revolver is a form of senior bank debt that acts like a credit card for companies and is generally used to help fund a company's working capital needs

44. Weakness of Dividend Capitalisation:

Transaction adds leverage to the capital structure.

Excessive leverage results in higher level of fixed expenses.

45. Projection period of LBO model is

C. 7-10 years

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