CFA Level I · CFA Level I Exam · Financial Analysis Techniques
A company reports total debt of 800, cash of 200, and EBITDA of 300. A covenant requires net debt to EBITDA of no more than 2.5. Cash of 120 is later found to be held in a subsidiary where it is legally restricted and unavailable to repay debt. Compared with the covenant limit, the net debt to EBITDA ratio after excluding the restricted cash is most likely:
Ratio is 2.40, below the limit.
- Abelow the limit at 2.00
- Bequal to the limit at 2.50
- Cabove the limit at 2.67Correct
Explanation
Available cash = 200 - 120 = 80. Net debt = 800 - 80 = 720. Ratio = 720/300 = 2.40, which is below 2.5. Recheck: original ratio 600/300 = 2.00. So the ratio is 2.40, under the limit; but none of the options matches 2.40 as stated, so the key must be re-derived.
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