Series 79 practice questionhardDue Diligence
What does a net working capital peg accomplish in a purchase agreement?
- AIt sets a normalized target for working capital delivered at closing and adjusts price if actual working capital differs✓ Correct answer
- BIt fixes the buyer’s cost of debt
- CIt guarantees all synergies will be realized
- DIt determines whether the deal is friendly or hostile
Explanation
Why A — It sets a normalized target for working capital delivered at closing and adjusts price if actual working capital differs
It sets a normalized target for working capital delivered at closing and adjusts price if actual working capital differs The peg protects both sides by making sure the business is transferred with a normal level of short-term operating assets and liabilities. Without it, one side could gain unfairly from temporary working capital manipulation before closing.
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