debt raising

CFA Level I Corporate Finance
#1

Hi guys!

Could you please help me with the example below. I’m not sure how to approach this kind of tasks.

"GT company is rated by a rating agency. In order to maintain its current ratings GT need to comply with the covenant of EBITDA/interest of at least 10x. Using the following data, calculate how much additional debt can the company raise?

Sales 4000 EBITDA 700 Interest expenses 60 Capital expenditure 180 Changes in working capital -18 Tax rate 0,2 Debt 800 Cash 100

My approach:

  1. Calculate the cost of debt (60/800 = 0,075)

  2. Compute the max amount of interest the company can pay out (EBITDA/10 => 700/10 = 70

  3. calculate the amount of debt the company can additionally raise ( 70/0,075 = 933,33)

The answer: The company can raise additionally 133 debt.

Is that a correct approach?

#2

100% correct my friend. Why the doubt? Rely more on your logic. Commonly, things are simpler than they look.

#3

Thanks for your reply. I was doubt because some guy told me that the correct answer is 100 and I just wanted to hear other people’s opinion.