PE fund Red Llama buys a company (with no existing debt or cash) for $500 million, at a purchase EBITDA multiple of 10.0x. Considering the financing, they figure they need to keep an interest coverage ratio of 1.8 post buyout. At that level the cost of debt is 7.4%. They borrow up to their debt capacity. At the end of the 3-year period, they sell the company at an exit EBITDA multiple of 12.0x. However, EBITDA has not changed at all. Capital expenditure and workin capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $60 million worth of debt during the 3-year period. Calculate Maximum Interest Capacity: . 18.63 b. 39.21 c. 27.78 d. 90

PE fund Red Llama buys a company (with no existing debt or cash) for $500 million, at a purchase EBITDA multiple of 10.0x. Considering the financing, they figure they need to keep an interest coverage ratio of 1.8 post buyout. At that level the cost of debt is 7.4%. They borrow up to their debt capacity. At the end of the 3-year period, they sell the company at an exit EBITDA multiple of 12.0x. However, EBITDA has not changed at all. Capital expenditure and workin capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $60 million worth of debt during the 3-year period. Calculate Maximum Interest Capacity: . 18.63 b. 39.21 c. 27.78 d. 90

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 10P: The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new...

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