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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Arjun Capital plans to buy Bharat Tools Ltd for an enterprise value of Rs 200 crore. It will fund 75% through debt and the balance through its own equity. Debt carries interest at 12% p.a. Bharat Tools is expected to generate EBITDA of Rs 40 crore, and annual capex plus tax outflow is Rs 10 crore. What is the interest cover (EBITDA / interest) in the first year?

Debt is 75% of Rs 200 crore, which is Rs 150 crore, so interest at 12% is Rs 18 crore. Dividing EBITDA of Rs 40 crore by Rs 18 crore gives an interest cover of about 2.22 times.

  1. A2.22 timesCorrect
  2. B2.00 times
  3. C1.67 times
  4. D3.33 times

Explanation

Debt = 75% of 200 = Rs 150 crore. Interest = 12% of 150 = Rs 18 crore. Interest cover = 40/18 = 2.22 times. Using EBITDA less capex and tax (30) gives 1.67 times, which is a different measure and not asked; using equity of 50 as base interest gives 6 and 6.67, also wrong.

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