Series 79 practice questionmediumAdvanced Financial Analysis
A company is being evaluated in an LBO scenario. The forecast projects $80 million in EBITDA next year. If the debt/EBITDA ratio post-transaction is set at 7.0x and the company expects to hold $30 million in cash, what is the company's pro forma total debt, and what key credit consideration should an analyst most closely examine given this capital structure?
- ATotal debt of $560 million; focus on projected revenue growth rates
- BTotal debt of $110 million; focus on target's current ratio
- CTotal debt of $30 million; focus on interest income projections
- D$560 million; assess free cash flow available for debt service✓ Correct answer
Explanation
Why D — $560 million; assess free cash flow available for debt service
The pro forma total debt is $560 million (7.0x EBITDA of $80 million). In highly leveraged deals, the critical credit consideration is whether free cash flow will be sufficient to cover interest and principal payments. The trap is focusing on growth or liquidity metrics when debt service is the immediate risk in an LBO structure.
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