"Company A has EBITDA of £60 in 2015 and is valued at 10x EBITDA. It issues £360 in debt. It's financial conditions worse in 2016 is now EBITDA of £40. It is now valued at 8x EBITDA in 2016. How much is the debt worth now?"
Initial thoughts were that it'd be worth 320? Since if the company is only worth 320 and was sold, debt holders would only be able to claim on that 320.
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Since if you sell the company with the new valuation, the company's value would be 40*8 = 320. Since debt holders get paid first, they would get paid the 320 which would be the new value of the debt. At least that is what I think but someone else can chime in.
Bump
It depends on what they did with the debt issuance proceeds. If they invested it into the business (or paid a dividend), and the business is still only worth 320, the debt is trading at 89 cents on the dollar. If the cash is still on the BS, debt should still trade at par.
i say it still stays at 360 without being impaired
Enterprise value = 600 = equity + debt - cash Enterprise value = 600 = ? equity + ? debt - ? cash +360 debt - 360 cash (issue of new debt has no impact on enterprise value since the new debt is offset by the new cash raised from the debt issue)
-----business deteriorates----
Enterprise value = ? equity + ? debt -? cash + 360 debt - 360 cash = 320 just means the equity got impaired, but you still have 360 of debtto drive this point home, i can use "dummy numbers"
of course when equity gets impaired, debt gets a haircut, but typically it would have to be quite major since you still have a nice equity cushion
I don't think this is right. I've asked around since i've asked this question and the first commenter seems to be right. If debt is greater than EV and the company is sold, the value of the company equals the value of the debt. In financial distress, the creditors would be paid with what the company has, not what it totally owes and pays it out in order of claims on the assets, which is why you perform a waterfall analysis.
first is absolutely right. what was this for rssg? or ib? assuming this is SA not FT?
Even if the EV is 320 it has more than 320 in assets, because EV at the core is the value of the company's OPERATING assets, and total amount it can repay debt holders is EV (operating assets) PLUS cash. What im saying is that if they issued debt for cash, they have more than 320 to repay debt holders....still dont understand your argument on how im wrong...thanks for the MS
The EV would be 320 which can be different from your Book value of EV. EV of 320 based on market multiple would mean if you were to sell your business today including its equity and debt you will receive 320. Implying that the debt becomes the headache of the incoming investor. That 320 is a cash out for your equity, meaning that the value of equity is down from 600 (assuming no debt back then) to 320. The rest all is debt. Therefore the value of your debt would be 600-320=280. Your incoming investor is valuing your debt at 280 and therefore deducted the same from your payout to pay it back to the debt holders.
does anybody in this thread even finance
I thought I did in the beginning but now not too sure
yelloweat is right on this one. At the very least, you should ask the interviewer Ncm55's question about what has happened with the $360 cash. It impacts the answer.
Yeah, the question of whether the cash is still on the balance sheet, or has in some fashion been spent, paid out in dividends, etc. matters a lot.
Many people here seem confused about EV/EBITDA valuations...
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