Series 79 practice questionmediumCapital Structure Analysis
Why do bankers often calculate both gross leverage and net leverage?
- AGross leverage includes equity while net leverage excludes it
- BCash can materially offset debt and change the borrower’s true repayment burden✓ Correct answer
- COnly net leverage can be used in credit documents
- DGross leverage is required only for public companies
Explanation
Why B — Cash can materially offset debt and change the borrower’s true repayment burden
Cash can materially offset debt and change the borrower’s true repayment burden Net leverage subtracts cash from debt to show the debt burden after immediately available liquidity is considered. The difference matters most when a company has a large cash balance that is freely usable to repay debt.
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