CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
A company reports EBITDA of 360, depreciation and amortization of 120, and interest expense of 80. Its EBIT coverage and EBITDA coverage of interest are closest to:
EBIT is 360 minus 120, or 240, giving EBIT interest coverage of 3.0x. EBITDA coverage is 360 divided by 80, or 4.5x. EBITDA coverage always exceeds EBIT coverage when depreciation is positive, so the first option is correct.
- AEBIT 3.0x; EBITDA 4.5xCorrect
- BEBIT 3.0x; EBITDA 6.0x
- CEBIT 4.5x; EBITDA 3.0x
Explanation
EBIT = 360 − 120 = 240. EBIT coverage = 240/80 = 3.0x. EBITDA coverage = 360/80 = 4.5x. The 6.0x figure wrongly adds depreciation back twice, and the last option swaps the ratios.
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