Question

"Consider a firm with EBIT of $3M and $10M of debt. Given the following data for...

"Consider a firm with EBIT of $3M and $10M of debt. Given the following data for rated firms in the same industry, what should be the rating of this firm? " Rating AAA AA A BBB Interest rate 4% 5% 6% 7% EBIT coverage 8 6 4 3 A. AA B. BBB C. AAA D. less than BBB E. A

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Answer #2

Ans:

EBIT : $3M

Debts : $10M

Rating and EBIT coverage Check:

Interest EBIT Coverage Interest for Above firm Working EBIT Coverage
AAA 4% 8 $10M * 4% = $0.4M $3M/0.4M 7.5
AA 5% 6 $10M * 5% = $0.5M $3M/0.5M 6
A 6% 4 $10M * 6% = $0.6M $3M/0.6M 5
BBB 7% 3 $10M * 7% = $0.7M $3M/0.7M 4.3

So the coverage ratio match at Rating AA.

Correct answer is option A.

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