Series 79 practice questionhardCredit Analysis
An investment banker is evaluating a leveraged buyout target with EBITDA of $200 million, total debt of $900 million, and annual interest expense of $54 million. What are the company's total leverage and EBITDA interest-coverage ratios?
- A5.5x leverage and 5.0x coverage
- B4.5x leverage and 2.7x coverage
- C5.5x leverage and 3.7x coverage
- D4.5x leverage and 3.7x coverage✓ Correct answer
Explanation
Why D — 4.5x leverage and 3.7x coverage
Total leverage is $900 million ÷ $200 million = 4.5x. EBITDA interest coverage is $200 million ÷ $54 million = approximately 3.7x. Whether lenders regard those ratios as acceptable depends on industry, cash-flow stability, collateral, covenants, and market conditions.
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