Based on the scenarios, which company's loan request would have the least favorable loss given default score?

Based on the scenarios, which company's loan request would have the least favorable loss given default score?

• A. Company X requesting funds for expansion
• B. Company Z looking for equipment financing
• C. Company Y acquiring a smaller company
• D. Company A seeking working capital

Answer: (C)

In assessing which company's loan request would likely have the least favorable loss given default (LGD) score, it is essential to consider the characteristics and inherent risks associated with the types of financing being sought. When a company is acquiring another company, as is the case with the request from Company Y, the transaction involves significant complexities and risks. Acquisition financing often entails higher uncertainty because it relates to the integration of two businesses, each with their own financial histories, cash flows, and operational risks. The potential for operational disruptions, changes in customer relationships, and challenges in achieving projected synergies can increase the risk profile dramatically. As a result, if an acquisition does not go as planned, the likelihood of loss to the lender is heightened, resulting in a higher LGD score. In contrast, the other types of financing requests generally present lower risks. For instance, expansion financing often indicates a company's growth strategy based on existing operations, while equipment financing is usually backed by the value of the equipment itself. Working capital requests tend to deal with day-to-day operations rather than significant long-term risks associated with acquisitions. Therefore, these scenarios tend to have lower LGD scores because they involve established cash flows or tangible collateral that can mitigate potential losses in the event of default. Thus

In assessing which company's loan request would likely have the least favorable loss given default (LGD) score, it is essential to consider the characteristics and inherent risks associated with the types of financing being sought.

When a company is acquiring another company, as is the case with the request from Company Y, the transaction involves significant complexities and risks. Acquisition financing often entails higher uncertainty because it relates to the integration of two businesses, each with their own financial histories, cash flows, and operational risks. The potential for operational disruptions, changes in customer relationships, and challenges in achieving projected synergies can increase the risk profile dramatically. As a result, if an acquisition does not go as planned, the likelihood of loss to the lender is heightened, resulting in a higher LGD score.

In contrast, the other types of financing requests generally present lower risks. For instance, expansion financing often indicates a company's growth strategy based on existing operations, while equipment financing is usually backed by the value of the equipment itself. Working capital requests tend to deal with day-to-day operations rather than significant long-term risks associated with acquisitions. Therefore, these scenarios tend to have lower LGD scores because they involve established cash flows or tangible collateral that can mitigate potential losses in the event of default.

Thus