Skip to content

FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A manager argues that a portfolio company's distress is purely financial, not economic. Which situation best fits financial distress without economic distress?

A viable, profitable business that cannot refinance excessive debt or near-term maturities shows financial distress without economic distress. The problem lies in the capital structure, not the operations. The other scenarios describe obsolete products, lost customers or returns below cost of capital, which are economic distress.

  1. AA firm whose business earns returns below its cost of capital and whose assets are worth more broken up than operating
  2. BA firm with a viable, profitable business whose excessive debt and near-term maturities cannot be refinancedCorrect
  3. CA firm whose products have become obsolete and whose revenues are falling steadily
  4. DA firm that has lost its key customers to a lower-cost competitor

Explanation

Financial distress without economic distress arises when the underlying business is viable but the capital structure, such as excess leverage or a maturity wall, cannot be serviced or refinanced. The other options describe weak operating fundamentals, which is economic distress.

Did you get it right without looking?

One question tells you little. A timed set on Distress Symptoms and Remedies shows your real accuracy, how long you take and where you lose marks.

Practise Distress Symptoms and RemediesFree diagnostic mock

More Distress Symptoms and Remedies questions