Use the figures in the cash flow statement below, including capital expenditure, to calculate
Payout EBITDA.
Cash flow statement £k EBITDA 3,280 Corporation tax (400) Interest (275) Inflow/(Outflow) 2,605
Dividends (125) Capital expenditure (360) Capital repayments (240) Working capital adjustments 185 Surplus/(Shortfall) 1,695
- £545k
- £1,215k
- £1,585k
- £2,060k
£1,215k
Based on the information in the table below, which of the following would fall within a realistic level to set a Gross Leverage covenant?
Year 1 Year 2
(£k) (£k)
Gross borrowings 25,100 24,000
Budget EBITDA 3,300 3,500
Payout EBITDA 2,500 2,600
- 6.2x
- 7.7x
- 8.5x
- 9.6x
8.5x
Using the figures below, calculate the CFADS:Debt Service Liability ratio.
Cash flow statement £k EBITDA 975 Corporation tax -55 Interest -200 Inflow/(Outflow) 720 Dividends -35 Capital expenditure -40 Capital repayments -50 Working capital adjustments 45 Surplus/(Shortfall) 640
- 2.56x
- 2.76x
- 3.23x
- 3.56x
3.56x
Which of the following is a definition of Payout EBITDA?
- The amount of profit required to meet all cash obligations
- The amount of profit required to meet all debt obligations
- The amount of profit required to meet dividend obligations
- The amount of profit required to fund capital expenditure
The amount of profit required to meet all cash obligations
You have agreed to set both a Profit and Cash Flow covenant for a new facility. Which one of the following regarding test levels is correct?
- Set the Profit covenant to breach before the Cash Flow covenant
- Set the Cash Flow covenant to breach before the Profit covenant
- Set the Profit and Cash Flow covenants to breach at the same time
- It does not normally matter which of the two covenants is set to breach first
Set the Profit covenant to breach before the Cash Flow covenant
Which one of the following statements regarding covenants test levels is correct?
- The test level must be set at the same level for the duration of the facility
- Ratcheted covenants will never be appropriate for a business in a turnaround situation
- Setting a ratcheted covenant may be particularly appropriate for a start-up business?
- The test level should be set above the customer forecasts at the start to ensure close monitoring of the facility
Setting a ratcheted covenant may be particularly appropriate for a start-up business?
You have set a monitoring formula to help you manage risk on an overdraft facility. Which one of the following statements is correct?
- If the facility regularly exceeds the terms of the monitoring formula, review with the customer and consider appetite for continuing the facility
- Amend the facility limit on the account so that it reflects the level of asset cover afforded by the monitoring formula calculations
- Where a facility is in excess of the agreed level of asset cover you can use the rights provided by the monitoring formula to demand repayment of the facility
- Protect the Bank’s position by issuing a waiver letter whenever the overdraft exceeds the level of cover afforded by the monitoring formula
If the facility regularly exceeds the terms of the monitoring formula, review with the customer and consider appetite for continuing the facility
Which one of the following is normally the best measure of the ability of the business to service and repay debt?
- EBITDA to Debt Service Liability
- CFADS to Debt Service Liability
- EBITDA to Interest Costs
- Gross Borrowing to EBITDA
CFADS to Debt Service Liability
Which one of the following best describes when you should normally consider setting Financial Covenants to help mitigate risk?
- All facilities including Overdrafts and Loans
- Committed facilities in excess of £1M
- On Demand Overdrafts in excess of £1M
- All Loan facilities with a term in excess of 12 months
Committed facilities in excess of £1M
EBITDA for a business in the last financial year was £1,300,000. Payout EBITDA has been calculated at shown below:- DEBT SERVICING COSTS £ Interest £150,000 Capital £250,000 Corporation Tax £350,000 Capital Expenditure £700,000 Dividends £100,000 Working Capital (£700,000) PAYOUT EBITDA £850,000 Based solely on this information, which one of the following observations would be a major concern?
- Payout EBITDA benefits from a large Working Capital adjustment that is not sustainable
- Capital Expenditure is clearly too high for a business with EBITDA of £1.3M
- Total Debt Servicing Costs are too high in relation to EBITDA
- An increase in Dividend payments will seriously undermine repayment capacity
Payout EBITDA benefits from a large Working Capital adjustment that is not sustainable
Using the figures in the Cash Flow Statement below, calculate the CFADS to Debt Service Liability Ratio? (Calculate CFADS by deducting Capital Expenditure)
CASH FLOW STATEMENT £
EBITDA £2,500,000
Corporation Tax (£ 250,000)
Interest (£ 750,000)
INFLOW £1,500,000
Dividends (£ 400,000)
Capital Expenditure (£ 100,000)
Capital Repayment/Lending (£ 200,000)
Working Capital Adjustments (£ 120,000)
SURPLUS £ 680,000
- 0.72
- 1.72
- 1.97
- 2.17
1.72
You have decided to set an EBITDA to Debt Service Liability covenant.
Customer Budget and Payout EBITDA projections are as follows:-
Year 1 Year 2
Budget EBITDA £2,800,000 £3,000,000
Payout EBITDA £2,000,000 £1,900,000
In which one of the following ranges for EBITDA would you normally expect to set the covenant test level?
- Below £1,900,000
- Between £2,300,000 and £2,600,000
- Between £2,800,000 and £3,300,000
- Above £3,500,000
Between £2,300,000 and £2,600,000
Based on the Budget prepared by your customer, you have calculated the CFADS to Debt Service Liability ratio for the next 4 years below.
CFADS to Debt Service Liability Ratio
Year 1 1.4
Year 2 1.3
Year 3 1.0
Year 4 1.1
Based solely on these figures, what would be your initial observations?
- Over the four year period, Cash Flow is good but will struggle to cover commitments in Years 1 & 2. The business will need to restructure if we are to consider lending
- Cash Flow is at acceptable levels in Year 3 and Year 4 but well below our requirements in Year 1 and Year 2. We would not consider providing facilities due to inability to service debt at the outset
- Cash Flow is positive in Year 1, reduces in Year 2 and is barely adequate in Year 3 and Year 4. This trend will need to be understood if we are to consider lending
- Surplus cash generated in Year 1 and Year 2 should be used to reduce debt so that servicing is not a problem in subsequent years. On this basis we would be prepared to lend
Cash Flow is positive in Year 1, reduces in Year 2 and is barely adequate in Year 3 and Year 4. This trend will need to be understood if we are to consider lending
Your customer has breached a covenant test level. Which one of the following statements is correct?
- Always issue a reservation of rights letter to protect the Bank’s position
- If you intend to renegotiate the loan terms and conditions you must first issue a formal demand letter
- A waiver letter must be issued on every occasion a customer is in breach before other action is considered
- Ignoring a covenant breach even if the position is quickly adjusted is likely to weaken the Bank’s position in respect of any subsequent breaches
Ignoring a covenant breach even if the position is quickly adjusted is likely to weaken the Bank’s position in respect of any subsequent breaches
What would be your initial observations on these budget figures and our calculation of Payout EBITDA for a new lending proposition?
Year 1 Year 2
Budget EBITDA £2,700,000 £2,800,000
Payout EBITDA £2,500,000 £2,550,000
- The figures are encouraging as there is a close correlation between Budget and Payout EBITDA indicating a robust forecasting process
- Customer will need to redraw Budgets to ensure a greater margin between Budget and Payout EBITDA if we are to consider lending
- There is real concern because with Payout EBITDA so close to the customer’s Budget there is little room for a deterioration in business performance
- We would only look at providing facilities where Payout EBITDA is in excess of the customer Budget EBITDA
There is real concern because with Payout EBITDA so close to the customer’s Budget there is little room for a deterioration in business performance
What is the principle benefit from calculating Payout EBITDA?
It confirms how much profit the business must generate to meet
- All cash obligations of the business
- All cash obligations of the business excluding debt service costs
- All cash obligations of the business prior to paying tax commitments
- All cash obligations of the business excluding capital repayments on debt
All cash obligations of the business
Using the figures in the Cash Flow Statement (including capital expenditure) below, calculate the Payout EBITDA figure. Cash Flow Statement £ EBITDA £1,250K Corporation Tax (£ 35K) Interest (£ 450K) Inflow (Outflow) £ 765K Dividends (£ 30K) Capital Expenditure (£ 70K) Capital Repayments/Lending (£ 100K) Working Capital Adjustments £ 50K Surplus(Shortfall) £ 615K
- £500K
- £600K
- £635K
- £735K
£635K
What is meant by debt headroom?
- Difference between short and long term debt levels
- Total Balance Sheet debt less the working capital requirement
- Total debt that the business can service and repay from existing profits
- Gap between existing debt levels and the quantum of debt the business is able to service
Gap between existing debt levels and the quantum of debt the business is able to service
Which one of the following is the best indicator of how much debt a business is carrying & if that debt is within acceptable limits?
- EBITDS to Debt Service Liability
- CFADS to Debt Service Liability
- EBITDA to Interest Costs
- Gross Borrowing to EBITDA
Gross Borrowing to EBITDA
