A. An equity investor is considering purchasing a company which has $1,200 of EBITDA for an 8x multiple. The investor is willing to invest $3,000. How much debt is required? Assuming 3 years from now EBITDA is $1,400 and the company is sold for an 8x multiple, what will be the equity return assuming no debt paydown? B. A company with EBITDA of $1,200 is purchased for an 8x multiple, financed with $6,000 of debt. How much equity is used to finance the purchase? Assuming the company reports interest expense of $240 on its income statement, what is interest coverage? C. Assume that the $6,000 of debt in the previous example consisted of $4,000 of senior debt and $2,000 of subordinated debt. Now assume that EBITDA drops to $600, and is still valued at an 8x multiple. In a bankruptcy, how much would senior debt recover? How much would subordinated debt recover?

D. Consider the following investment grade company:

EBITDA 500 Debt 1,000 Rent 50 1. Calculate EBITDA/interest, fixed charge coverage and Debt/EBITDA

2. Discuss why fixed charge coverage is a better ratio than EBITDA/interest when calculating a firms ability to service its obligations.

E. Calculate EBITDA/interest for the following two companies:

Debt EBITDA Interest Expense Company A 700 100 56 Company B 200 100 8

F. Discuss why interest expense as reported on the income statement should not be used when calculating interest coverage. G. Discuss the difference between one year default rates and cumulative default rates.