FRM Part II · FRM Exam Part II · Credit Risk Management
A loan officer reviewing a mid-sized manufacturer notes: EBITDA USD 12 million, interest expense USD 3 million, total debt USD 36 million, and cash USD 6 million. Which calculation gives the net debt to EBITDA ratio?
Net debt to EBITDA subtracts cash from total debt before dividing by EBITDA. Debt of USD 36 million less cash of USD 6 million is USD 30 million, divided by USD 12 million EBITDA, giving 2.5x. Using gross debt would wrongly give 3.0x.
- A3.0x
- B2.5xCorrect
- C4.0x
- D3.6x
Explanation
Net debt = 36 - 6 = 30; 30/12 = 2.5x. 3.0x uses gross debt (36/12). 4.0x is EBITDA/interest. 3.6x is not a valid measure here.
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