In this workout, we're gonna take a look at multiple based debt capacity analysis. So in this case, we've got a little income statement extract here, both from the income statement to the top where we've got sales and operating expenses and we've got year zero and a forecast for year one, year two, and year three, four and five. The year zero we're gonna treat as a historical year and then year onwards... Year one onwards is going to be a projected year. So these are gonna be our five years of projections. And then we've got a historical year. So our operating profit is just going to be the sales number minus the operating expenses. And then I'm going to copy that right to year five. Then I'm gonna come down and we've got debt capacity using a debt to EBITDA multiple. Now in this case we have an assumption which says we can raise up to five times EBITDA.

So I'm firstly going to calculate EBITDA by taking my EBIT, which is in this case the same as my operating profit. And I'm going to add the depreciation and amortization number of 100, and that will give me my historical EBITDA. So this is a last 12 months EBITDA number. And so my debt capacity is going to be five times the 750.

So that is just a simple deck capacity calculation based on five times the historic EBITDA or last 12 months EBITDA. And it's rough and ready calculation. It doesn't include any analysis of the cash flow generation of the business, and the ability of the business to service this loan from its cash flows. So it's just a simplistic methodology. Now, in our next example, we are going to take a look at whether the structure can finance debt based on a projected EBITDA number and its ability to cover the interest. Now in here we've got an assumption which says EBITDA over interest expense should be 3.5, no lower than 3.5. In other words, you want 3.5 times the interest expense as your EBITDA. So the first thing we're going to do is we're gonna pull in the EBITDA number, but because this is a kind of more of a forward-looking methodology we're gonna take the operating profit in year one and we're gonna add the depreciation and amortization in year one as well. So that gives us the 747.5 number and the maximum interest expense that we can sustain, given that assumption of three-and-a-half times, is going to be our EBITDA divided by the three-and-a-half times multiple. In this me in this case, this means that the interest expense times three-and-a-half equals the EBITDA. So what does that mean for our debt capacity? Well, assuming an interest rate of 5% that 225 equals the total interest expense. So what we can now do is we can calculate the debt capacity by taking the total interest expense and grossing it up by the current interest rate of 5%. In other words, what this means is, that 5% of our estimated debt capacity of 4,500 is going to equal the interest expense limit of 225 and that times three-and-half is going to equal our EBITDA. So these are two methods of calculating debt capacity using multiples. One used using a multiple of LTM EBITDA and the other is using an interest expense coverage ratio. The most commonly used in the markets is debt capacity using the LTM EBITDA multiple.