Series 79 practice questioneasyCapital Structure Analysis
What is the main purpose of a revolving credit facility in a sponsor-backed capital structure?
- ATo permanently finance goodwill
- BTo provide flexible short-term liquidity for seasonal swings or working capital needs✓ Correct answer
- CTo replace all equity capital
- DTo avoid any financial covenants
Explanation
Why B — To provide flexible short-term liquidity for seasonal swings or working capital needs
To provide flexible short-term liquidity for seasonal swings or working capital needs A revolver is designed to be drawn and repaid as cash needs fluctuate, unlike term debt that funds permanent capital needs. Because it protects liquidity, the revolver is often a critical first layer of financing in LBO structures.
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