Skip to content

FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

Firm Alpha has EBITDA of USD 40 million, interest expense of USD 25 million, and capital expenditures of USD 10 million required to maintain operations. Total debt is USD 300 million. Which assessment best identifies the firm's distress symptom?

Coverage is 1.6x on EBITDA and only 1.2x after USD 10 million of maintenance capex, while debt is 7.5 times EBITDA. That is a thin cushion with high leverage, a clear distress symptom. Options inverting the ratio or calling leverage low are wrong.

  1. AInterest coverage (EBITDA/interest) of 1.6x, but after maintenance capex coverage falls to 1.2x, indicating thin liquidity cushion and elevated distress riskCorrect
  2. BInterest coverage of 0.625x, indicating immediate default
  3. CLeverage of 7.5x debt/EBITDA is low and indicates no distress risk
  4. DInterest coverage of 4.0x, indicating a strong cushion

Explanation

EBITDA/interest = 40/25 = 1.6x. After maintenance capex, (40-10)/25 = 1.2x. Debt/EBITDA = 300/40 = 7.5x, which is high, not low. The 0.625x option inverts the ratio and the 4.0x option is not supported by the data.

Did you get it right without looking?

One question tells you little. A timed set on Distress Symptoms and Remedies shows your real accuracy, how long you take and where you lose marks.

Practise Distress Symptoms and RemediesFree diagnostic mock

More Distress Symptoms and Remedies questions