A. Discuss the difference between one year default rates and cumulative default rates.

B. 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?

C. 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?