40 million shares outstanding, $2.50 share price, leverage cash flow yield of 10%, EBITDA margin of 20%, Coverage ratio of 2x, and interest rate of 5%. Calculate the levered free cash flow and the total debt.
I know levered FCF is 2.50 into 40 into 10% = 10 mil. How do I get to total debt?
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Houlihan Lokey asked me a similar question and I had no fuckin idea.
Yeah I got asked that in an interview as well and it's killing me to not know the answer and I can't seem to figure it out lol.
use coverage ratio to get total debt
Yeah I would, but I don't have the EBITDA value so how am I supposed to use the coverage ratio, assuming coverage ratio is EBITDA/Debt Expense and that is EBITDA / (int. rate. * total debt) so that can be rearranged as
Total Debt = EBITDA / (int. rate * coverage ratio) = EBITDA / (0.05 * 2) = EBITDA / 0.10
I get stuck here so idk what to do because I have the EBITDA margin but not the EBITDA (cuz I don't have total revenue).
What if I use lev. FCF as a proxy for EBITDA and then solve to get to Total debt?
.
cash flow coverage not EBITDA coverage
I could be wrong, but I think the formula is:
($10,000,000+0.05x)/0.05x = 2
x = debt amount = $200,000,000 (assuming 5% interest only)
Check work below:
EBITDA = $20,000,000
Interest payment = 5%*$200,000,000 = $10,000,000
$20,000,000/$10,000,000 = 2x DSCR
$20,000,000 - $10,000,000 = $10,000,000
$10,000,000/$100,000,000 = 10% yield
What formula are you using here?
It's not a "financial formula," it's just algebra. EBITDA/Debt Service = DCSR. The main trick is that we know the the Cash Flow to Equity After Debt Service, but we do not know EBITDA.
Let's break down ($10,000,000+0.05x) first, which solves for EBITDA. We know that the formula for Cash Flow to Equity After Debt Service is
EBITDA - Debt Service and we know that Cash Flow to Equity After Debt Service is $10,000,000, so that means if you add the Debt Service back to Cash Flow to Equity After Debt Service then you get EBITDA hence $10,000,000 (which is the Cash Flow to Equity After Debt Service) + 0.05x (which is the Debt Service, 5% of the Debt Amount)
Now that we have EBITDA, we just take the EBITDA and divide by the Debt Service, which we know must equal 2
How did you get EBITDA to 20mil?
Read ^ you actually don't need EBITDA to solve what is being asked for, but if you wanted to solve for it, it would be solved for last, but basically once we solve for the debt amount, then we can solve for the debt service and then you just add the debt service to the $10,000,000 cash flow to equity
Might need to make some assumptions around tax rate. Not sure
Why? Isn't everything being asked about before taxes?
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