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

B. 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?

C. Assume that the $6,000 of debt in 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:(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?