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CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers

Two firms in the same industry have equal EBITDA. Firm X has total debt of 400 and Firm Y has total debt of 600, with EBITDA of 200 for each. Holding all else equal, the analyst's capacity assessment most likely indicates that:

Firm Y has weaker capacity. Its debt-to-EBITDA is 3.0x versus 2.0x for Firm X, so with identical EBITDA it carries more debt relative to cash earnings. Higher leverage lowers the ability to service debt, all else equal.

  1. AFirm X has a higher debt-to-EBITDA ratio than Firm Y
  2. Bthe two firms have equal leverage because EBITDA is equal
  3. CFirm Y has weaker capacity because its debt-to-EBITDA is higherCorrect

Explanation

Debt/EBITDA is 400/200 = 2.0x for X and 600/200 = 3.0x for Y. Higher leverage for the same cash earnings means weaker capacity for Y. Equal EBITDA does not imply equal leverage.

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