Question

1. An equity investor is considering purchasing a company which has $575 of EBITDA for a 6x multiple. The equity sponsor is going to put in $1,438 of equity. How much debt is needed? What multiple of EBITDA is this debt? Assuming a 10% interest rate, what would interest coverage be after the acquisition?

2. A company with EBITDA of $1,250 is purchased for a 7x multiple, financed with $6,250 of debt. How much equity is used for the purchase? Assuming EBITDA drops to $900 and the company is still valued at 7x, how much is the equity worth?

3. In question #2 above, assume EBITDA falls to $800, and the company is still valued at 7x. What is the equity worth in this case? If the company were to file for bankruptcy, what could the debt hope to recover?

Answer 1

Answer 1:

Value of Company = (EBITDA * mutiple)

= 575*6

= $ 3450

Value of Debt required = value of Comapny - Equity

= 3450 - 1438

= $ 2012

Interest Expense = 2012*10% = $ 201.20

Interest covergae = EBITDA/ Interest expense

= 575/201.20

= 2.858

Answer 2

Value of Company = (EBITDA * mutiple)

= 1250* 7

= $ 8750

Debt = $ 6250

Equity required = value of company - Debt

= 8750 - 6250

= $ 2500

If EBITDA drops to $ 900

Value of Company = 900*7

= $ 6300

Equity Worth = value of company - debt

= 6300 - 6250

= $ 50

Answer 3

If EBITDA drops to $ 800

Value of Company = 800*7

= $ 5600

Equity Worth = value of company - debt

= 5600 - 6250

= - $ 650

Debt hope to recover = $ 5600

In % term Hope to recover = (5600/6250)*100 = 89.6%