See this bond interest coverage covenant: A/B shall not fall below 2.85:1.

A=Rev
+ deferred taxes. B=Interest expense + lesser of a) One third of the average of last 2
fiscal year of depreciation and b) Deferred taxes + the greater of i) after tax gain on s
100.

Use the information in the table below to answer this question: what is maximu

LFY
Revenue $1,000
Cash COGS $600
Cash SGA $200
Interest expense $15
Gain on sale (before tax) $70
Other income $5
------------
Pretax income $250
Tax @ 35% 35%
------------
Net income $163

Cash flow statement

Depreciation $10
Deferred tax $7

A $207
B $68

A/B 3.07x
Add $5 to interest expense (D13) A/B will be ~2.85
@ 5% and $5 new interest max new debt = $100

What this shows

Shows simpler bond covenant and solution (sheet 2 more complex covenant) to dete
covenant (which is a rule governing things like additional indebtedness). This sheet
/B shall not fall below 2.85:1. A=Revenue-all cash operating costs
of a) One third of the average of last 2 fiscal years of SGA – last
es + the greater of i) after tax gain on sale and ii) gross margin *

swer this question: what is maximum amount of new debt company could incur at interest rate of 5%?

LFY-1
--
--
$220
--
--
--

--
--

--

--
--

Detain on B
Detail on B ------------->
$15 Interest expense
$60 a) One third of the average of last 2 fiscal years of SGA – last fiscal y
b):
$7 Deferred taxes
$46 i) After tax gain on sale
$40 ii) Gross margin * 100
$53 b)
$53 Lesser of a) and b)
$68 Interest expense + lesser of a) and b)

eet 2 more complex covenant) to determine extra interest sustainable under

additional indebtedness). This sheet good for practice before doing sheet 3 hw.
rs of SGA – last fiscal year of depreciation
See this bond interest coverage covenant: A/B shall not fall below 2.75:1. A=Rev
taxes. B=Interest expense + greater of a) One third of the average of last 2 fiscal yea
depreciation and b) Deferred taxes + the lesser of i) after tax gain on sale and ii) gro

Use the information in the table below to answer this question: what is maximu

LFY
Revenue $1,000
Cash COGS $600
Cash SGA $200
Interest expense $15
Gain on sale (before tax) $70
Other income $5
------------
Pretax income $250
Tax @ 35% 35%
------------
Net income $163

Cash flow statement

Depreciation $10
Deferred tax $7

A $393
B ?

A/B = #VALUE!
/B shall not fall below 2.75:1. A=Revenue - cash COGS - deferred
third of the average of last 2 fiscal years of SGA + last fiscal year of
of i) after tax gain on sale and ii) gross margin * 100.

swer this question: what is maximum amount of new debt company could incur at interest rate of 5%?

LFY-1
--
--
$220
--
--
--

--
--

--

--
--

<-- Solve for B in cell D27 according to covenant at top. Then add to interest
expense in D13 until this ratio is 2.75x. That is the amount of new interest the
company can legally sustain. Then divide that new interest by the 5% rate and you
will know the maximum amount of new debt that can be sustained under the
covenant.
Question: Based on the covenant below, please determine the amount of additional indebtedness
the company could incur in latest fiscal year (LFY) assuming an interest rate of 5.00%. Please
note: for asset sales, sales in the current year represent the sale of assets held at the end of the prio
year. Once you calculate A/B then change the amount of interest in cell C45 until A/B hits the limi
of 2.5x. That is the maximum amount of total interest. Divide the new interest you added by the
interest rate (5%) to calculate the amount of new debt allowable.

Fixed charge coverage ratio covenant

The fixed charge coverage ratio defined as A/B shall not fall below 2.5:1. A = operating income + 2x
non-cash operating expenses – capital expenditures + net working capital changes. B = the greater of a)
interest expense + 20% of operating lease payments * the lesser of i) 1.3x average rent expense for the
prior 3 fiscal years or ii) 15% of LFY COGS + cash dividends and b) interest expense + 1.2x * cash taxe
+ capital expenditures – 1/4 asset sale proceeds after tax.

$'s in millions

Income 2016 2015 2014

Revenue $279 $240 $220
Growth 16.3% 9.1% --

COGS $129 $92 $81

----------- ----------- -----------
GP $150 $148 $139
GM 53.8% 61.7% 63.2%

S&A $46 $33 $32

% of Rev. 16.5% 13.8% 14.5%

Advertising $14 $11 $10

% of Rev. 5.0% 4.6% 4.3%

Rent $10 $8 $7

Repairs $3 $2 $3
----------- ----------- -----------
Tot S,G&A $63 $46 $45
% of Rev. 22.6% 19.2% 20.2%
 ----------- ----------- -----------
Operating income $87 $102 $95
GM 31.2% 42.5% 43.0%

Interest $12 $11 $10

Pretax income $75 $91 $85

Tax rate 35% 35% 35%

Taxes $26 $32 $30

Net income $49 $59 $55

Dividends $15 $18 $16

Cash flow
Deprecation $16 $7 $6
Stock options $10 $4 $3
Provision for doubtful accounts $2 $1 $1
Deferred taxes $11 ($13) $12
Non-operating restructuring charge $2 $2 $2

Change in receivables ($3) ($2) ($2)

Change in inventory $4 $2 $1
Change in payables $4 $3 $1

Capital expenditures $8 $7 $6
Asset sale proceeds $24 $18 $0

Balance sheet
Assets held for sale $0 $15 $10

Notes to financial statements

Payments on operating leases $12 $11 $9

SOLUTION
Components
Numerator
 $87 Operating income
$48 + (2x non-cash operating expenses – capital exp
$5 + Net working capital changes
Sum of components (=A) $140 = Numerator
Done in 1 formula $140 <--Same result done all in 1 formula

Denominator
a) components
$12 Interest expense
$2 20% of operating lease payments

i) solution $11 1.3x average rent expense for the prior 3 fiscal y
ii) solution $34 15% of LFY COGS + cash dividends
Minimum i and ii $11 = minimum of i) 1.3x average rent expense for t

=a) solution $38 = a) interest expense + 20% of operating lease p

b) components
$12 Interest expense
$27 1.2x * cash taxes + capital expenditures
$5 1/4 asset sale proceeds after tax
=b) solution $34 = b) interest expense + 1.2x * cash taxes + capit

Maximum of a) and b) (=B) $38 = Denominator

Done in 1 formula $38 <--Same result done all in 1 formula
-----------
Fixed charge coverage ratio (A/B) 3.68x
Enter additional interest of $18 cell C45 = $30 total interest = $18/.05=$360 new debt @ 5%

What this shows

Shows more complex bond covenant and solution to determine extra interest sustainable under covenant
of additional indebtedness
st rate of 5.00%. Please
ts held at the end of the prior
ll C45 until A/B hits the limit
interest you added by the

A = operating income + 2x
hanges. B = the greater of a)
average rent expense for the
est expense + 1.2x * cash taxes
erating expenses – capital expenditures)
ital changes

ne all in 1 formula

ease payments

expense for the prior 3 fiscal years

S + cash dividends
.3x average rent expense for the prior 2 fiscal years AND ii) 15% of LFY COGS + cash dividends

se + 20% of operating lease payments * the lesser of i) 1.3x average rent expense for the prior 2 fiscal years or ii) 15% of LFY CO

+ capital expenditures
eeds after tax
se + 1.2x * cash taxes + capital expenditures – 1/4 asset sale proceeds after tax.

ne all in 1 formula

$360 new debt @ 5%

est sustainable under covenant (which is a rule governing things like additional indebtedness).
cal years or ii) 15% of LFY COGS + cash dividends
Question: Based on the covenant below, please determine the amount of additional indebtedness th
company could incur assuming an interest rate of 4.00%. Please note: for asset sales, sales in the c
year represent the sale of assets held at the end of the prior year. For your response you must only
the denominator (B in the covenant). Please do so using max and min statements in excel and ente
C80. I already provide the numerator.

Fixed charge coverage ratio covenant

The fixed charge coverage ratio defined as A/B shall not fall below 2.75:1. A = operating income + 3x n
operating expenses – capital expenditures + net working capital changes. B = the greater of a) interest ex
30% of operating lease payments * the lesser of i) 1.2x average rent expense for the prior 3 fiscal years o
LFY COGS + cash dividends and b) interest expense + 1.1x * cash taxes + capital expenditures – ½ asse
proceeds after tax.

$'s in millions

Income 2016 2015 2014

Revenue $279 $240 $220
Growth 16.3% 9.1% --

COGS $129 $92 $81

----------- ----------- -----------
GP $150 $148 $139
GM 53.8% 61.7% 63.2%

S&A $46 $33 $32

% of Rev. 16.5% 13.8% 14.5%

Advertising $14 $11 $10

% of Rev. 5.0% 4.6% 4.3%

Rent $10 $8 $7

Repairs $3 $2 $3
----------- ----------- -----------
Tot S,G&A $63 $46 $45
% of Rev. 22.6% 19.2% 20.2%

----------- ----------- -----------

Operating income $87 $102 $95
GM 31.2% 42.5% 43.0%

Interest $12 $11 $10

Pretax income $75 $91 $85

Tax rate 35% 35% 35%

Taxes $26 $32 $30

Net income $49 $59 $55

Dividends $15 $18 $16

Cash flow
Deprecation $16 $7 $6
Stock options $10 $4 $3
Provision for doubtful accounts $2 $1 $1
Deferred taxes $11 ($13) $12
Non-operating restructuring charg $2 $2 $2

Change in receivables ($3) ($2) ($2)

Change in inventory $4 $2 $1
Change in payables $4 $3 $1

Capital expenditures $8 $7 $6
Asset sale proceeds $24 $18 $0

Balance sheet
Assets held for sale $0 $15 $10

Notes to financial statements

Payments on operating leases $12 $11 $9

SOLUTION
Numerator $168 -- --
Denominator ? -- --

Fixed charge coverage ratio #VALUE! -- --

Hint: Use breakout in sheet 2 formula just change amounts to match sheet 3.
 dditional indebtedness the
asset sales, sales in the current
r response you must only calculate
tements in excel and enter in cell

= operating income + 3x non-cash

the greater of a) interest expense +
or the prior 3 fiscal years or ii) 20% of
pital expenditures – ½ asset sale
Question: Based on the covenant below, please determine the amount of additional indebtedness
the company could incur in latest fiscal year (LFY) assuming an interest rate of 4.00%. Please
note: for asset sales, sales in the current year represent the sale of assets held at the end of the prio
year. For your response you must only calculate the denominator (B in the covenant). See detail
below.

Fixed charge coverage ratio covenant

The fixed charge coverage ratio defined as A/B shall not fall below 2.75:1. A = operating income + 3x
non-cash operating expenses – capital expenditures + net working capital changes. B = the greater of a)
interest expense + 30% of operating lease payments * the lesser of i) 1.2x average rent expense for the
prior 3 fiscal years or ii) 20% of LFY COGS + cash dividends and b) interest expense + 1.1x * cash taxe
+ capital expenditures – ½ asset sale proceeds after tax.

$'s in millions

Income 2016 2015 2014

Revenue $279 $240 $220
Growth 16.3% 9.1% --

COGS $129 $92 $81

----------- ----------- -----------
GP $150 $148 $139
GM 53.8% 61.7% 63.2%

S&A $46 $33 $32

% of Rev. 16.5% 13.8% 14.5%

Advertising $14 $11 $10

% of Rev. 5.0% 4.6% 4.3%

Rent $10 $8 $7

Repairs $3 $2 $3
----------- ----------- -----------
Tot S,G&A $63 $46 $45
% of Rev. 22.6% 19.2% 20.2%

----------- ----------- -----------

Operating income $87 $102 $95
GM 31.2% 42.5% 43.0%

Interest $12 $11 $10

Pretax income $75 $91 $85

Tax rate 35% 35% 35%

Taxes $26 $32 $30

Net income $49 $59 $55

Dividends $15 $18 $16

Cash flow
Deprecation $16 $7 $6
Stock options $10 $4 $3
Provision for doubtful accounts $2 $1 $1
Deferred taxes $11 ($13) $12
Non-operating restructuring charge $2 $2 $2

Change in receivables ($3) ($2) ($2)

Change in inventory $4 $2 $1
Change in payables $4 $3 $1

Capital expenditures $8 $7 $6
Asset sale proceeds $24 $18 $0

Balance sheet
Assets held for sale $0 $15 $10

Notes to financial statements

Payments on operating leases $12 $11 $9

SOLUTION
Components
Numerator
$87 Operating income
$76 + (3x non-cash operating expenses – capital exp
 $5 + Net working capital changes
Sum of components (=A) $168 = Numerator
Done in 1 formula $168 <--Same result done all in 1 formula

Denominator
a) components
$12 Interest expense
$4 30% of operating lease payments

i) solution $10 1.2x average rent expense for the prior 3 fiscal y
ii) solution $40 20% of LFY COGS + cash dividends
Minimum i and ii $10 = minimum of i) 1.3x average rent expense for t

=a) solution $48 = a) interest expense + 20% of operating lease p

b) components
$12 Interest expense
$25 1.1x * cash taxes + capital expenditures
$10 1/2 asset sale proceeds after tax
=b) solution $27 = b) interest expense + 1.1x * cash taxes + capit

Maximum of a) and b) (=B) $48 = Denominator

Done in 1 formula $48 <--Same result done all in 1 formula
-----------
Fixed charge coverage ratio (A/B) 3.50x
Enter additional interest of $13 cell C45 = $25 total interest = $13/.04=$325 new debt @ 4%

What this shows

Shows more complex bond covenant and solution to determine extra interest sustainable under covenant
of additional indebtedness
st rate of 4.00%. Please
ts held at the end of the prior
n the covenant). See detail

A = operating income + 3x
hanges. B = the greater of a)
average rent expense for the
est expense + 1.1x * cash taxes
erating expenses – capital expenditures)
 ital changes

ne all in 1 formula

ease payments

expense for the prior 3 fiscal years

S + cash dividends
.3x average rent expense for the prior 2 fiscal years AND ii) 20% of LFY COGS + cash dividends

se + 20% of operating lease payments * the lesser of i) 1.3x average rent expense for the prior 2 fiscal years or ii) 15% of LFY CO

+ capital expenditures
eeds after tax
se + 1.1x * cash taxes + capital expenditures – 1/2 asset sale proceeds after tax.

ne all in 1 formula

$325 new debt @ 4%

est sustainable under covenant (which is a rule governing things like additional indebtedness).
prior 2 fiscal years or ii) 15% of LFY COGS + cash dividends