Question

5. If the covenant required the company to e covenant required the company to cover all interest, not just cash interest, what amount of EBIDTA would be required2 (Hint: all interests includes the coupon plus che purt paid as the bond grows from 950 1000 al maturity, all of which is paid at maturity.) A. $165,363,605 B. $174,066,953 C $189,444,566 D. $73,494,936 See the following bond interest.coverage covenant A/B shall not fall below 2.75:1. A Revenue-all cash operating costs + other income Interest expense + greater of a) One third of the average of last 2 fiscal years of SGA last fiscal year of depreciation and b) 20% of Pretax income + the lesser of 1) after tax gain on sale and ii) operating margin * 100. Use the information in the table below to answer the questions. last fiscal year last fiscal year - 1 Income statement Revenue Cash COGS Cash SGA $1,200 $600 $200 Op. Income $400 Interest expense Gain on sale (before tax) Other income $15 $40 $5 Pretax income Tax @ 35% $430 $151 Net income $280 Cash flow statement Depreciation Deferred tax $10 $7 6. What is A (numerator)? A. $207 B. $405 C. $395 D. $57

Answer 1

Q - 6

A = Revenue - Cash COGS - Cash S, G & A + other income = 1,200 - 600 - 200 + 5 = $ 405

Hence, the correct answer is option B. $ 405

Q - 7

B = interest expense + max [1/3 x average SGA + depreciation, 20% of pre tax income + min (after tax gain on sale, operating margin x 100]

Average SGA = (200 + 220) / 2 = 210

Depreciation = 10, Pre tax income = 430,

After tax gain on sale = Gain on sale (before tax) x (1 - tax rate) = 40 x (1 - 35%) = 26

Operating margin = operating income / sales = 400 / 1,200 = 0.3333

Hence, B = 15 + max [1/3 x 210 + 10, 20% x 430 + min (26, 0.3333 x 100) = 15 + max (80, 86 + min (26, 33.33)) = 15 + max (80, 86 + 26) = 15 + 86 + 26 = 127

Hence, the correct answer is option B. $ 127

Q - 8

Please note that incremental debt will lead to incremental interest which will lower the pre tax income as well. Let I be the incremental interest then, the value of B now = 15 + I + max [80, 20% x (430 - I) + 26]

A / B = 2.75

B = A/ 2.75 = 405 / 2.75 = 147.2727273 = 15 + I + max [80, 20% x (430 - I) + 26]

Assume, 80 > 20% x (430 - I) + 26

Hence, 147.2727 = 15 + I + 80

hence, I = 147.2727 - 15 - 80 = 57.27

20% x (430 - I) + 26 = 20% x (430 - 57.27) + 26 = 101.55 which is > 80. Hence our assumption that 80 > 20% x (430 - I) + 26 is wrong.

Let's now assume otherwise, 80 < 20% x (430 - I) + 26

Hence, B = 147.2727 = 15 + I + 20% x (430 - I) + 26 = 0.8I + 127

Hence, I = (147.2727 - 127) / 0.8 = 25.34

Hence, incremental debt = I / i = 25.34 / 5% = $ 506, say $ 500

Hence, correct answer is option A. $ 500

Q - 9

The correct answer is option A. The Borrower

The borrower usually file for this protection.

Q - 10

Correct answer is option E. C and D

The options in C & D are examples of sister guarantee.