Question: A. Discuss the difference between one year default rates and cumulative default rates. B . Consider the following investment grade company:(Please answer second Part) EBITDA500

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

B. Consider the following investment grade company:(Please answer second Part)

EBITDA500

Debt1,000

Rent50

1.Calculate EBITDA/interest, fixed charge coverage and Debt/EBITDA

Debt / EBITDA = 1000/500 = 2x

EBITDA /Interest expense= $ 500 / (1000*6%) = 500/60 = 8.3x

Fixed charge coverage = (EBITDA + Rents) / (Interest Expense + Rents) = (500 + 50)/ (60+50) = 5x

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

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