Question

Use the following information to answer questions 28-29.

2016 adjustments Proforma

Revenues 12,000

COGS 4,000

SG&A 2,000

Depreciation 500

Operating Income 5,500

Debt 20,000

Assume that this company made an acquisition of a company with 6,000 of sales with similar gross margins to the existing company. Assume additional SG&A expenses of $500. Assume the purchase was financed with $14,000 of additional debt.

28. Calculate Debt/EBITDA after making the proforma adjustments.

29. Calculate EBITDA/interest after making the proforma adjustments.

Answer 1

The proforma adjustments is as follows:

The EBITDA is calculated below:

	Before acquisition	After acquisition	Total
Sale	12,000	6,000	18,000
COGS	4,000	2,000 (Working Note 1)	6,000
Gross Profit	8,000	4,000	12,000
SG&A	2,000	500	2,500
EBITDA	6,000	3,500	9,500

Working Note:1

Profit Margin = 8,000 / 12,000 *100

= 66.67%

Gross Margin for acquisition of the company = 6,000 * 66.67%

= 4,000

COGS  = Sale - Gross Profit

= 6,000 - 4,000

= 2,000

28) The Debt/EBITDA after making the proforma adjustments is calculated below:

= Debt / EBITDA

= ($20,000 + $14,000)/ 9,500

= $34,000/9,500

= 3.58

29) There is no specific information is given about the amount of interest. There is a amount of EBITDA . Therfore due to absence of interest the calculation of EBITDA/interest is not possible.