CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
A company reports EBIT of 480 million, EBITDA of 600 million, and interest expense of 80 million. Total debt is 1,800 million. The company's EBIT interest coverage and debt-to-EBITDA ratios are closest to:
EBIT interest coverage is 480 divided by 80, or 6.0 times, and debt-to-EBITDA is 1,800 divided by 600, or 3.0 times. The other options mix EBITDA and EBIT in the wrong ratios.
- AEBIT coverage 6.0x; debt-to-EBITDA 3.0xCorrect
- BEBIT coverage 7.5x; debt-to-EBITDA 3.0x
- CEBIT coverage 6.0x; debt-to-EBITDA 3.75x
Explanation
EBIT coverage = 480/80 = 6.0x. Debt-to-EBITDA = 1,800/600 = 3.0x. Using EBITDA for coverage gives 7.5x, and using EBIT in the leverage ratio gives 3.75x, which are the distractor mistakes.
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