Debt Capacity via Multiples Workout
- 01:21
Calculate debt capacity based on leverage and coverage ratios
Transcript
In this workout, we're asked to calculate two debt capacities Firstly on the basis of last 12 months debt to EBITDA multiple and secondly on year 1 interest coverage ratio for Pizza Plc We've got an income statement exert and we've got a cash flow statement exert as well So let's start doing our debt capacity using a debt to EBITDA multiple, we've been given a figure of 5 I know that my EBIT is 650, I'm going to add on depreciation and amortization of 100 To give us 750 EBITDA Therefore I can take that EBITDA times it by 5 and there we go, debt capacity of 3,750 Now let's do the other way using the interest cover multiple We've got the interest cover multiple of 3.5 (this is for the year forward) And we've got a current interest rate as well Let's calculate the EBITDA in this period, so again I go up to my operating profit, add on D&A And I've now got EBITDA in this period My maximum interest expense therefore must be the 787.5 divided by the interest cover ratio So it comes to 225 If 225 represents 5%, then I can divide that 225 by 5% to get to the debt capacity Giving me a figure of 4,500