How to advice a client on raising Debt?

Assume you are a banker advising a client with a Debt/Equity ratio of 5x. The client's interest coverage is 1.3x and they are expecting a 10% decrease in operating income next year. Their current interest expense is Rs.10 crores (100 million). How much new debt can your client safely take @10% interest without going bankrupt?

Hi Sir,

In the above question, how to find the additional interest expense the company can handle which is said to be equal to 10% of the debt (from the question)?

Please explain :)

1 Answer(s)


hi narpath this is good question but logical one
at present operating income is 1.3 times of present interst expense (10*1.3 = 13 crore), now in coming year it would decrease by 10% as per question hence it would become 11.7 crore(13*.90 = 11.7).
now how much more interest company can bear can be worked out
which is like this ==>> 11.7 - 10 = 1.7crore.

now to pay up to 1.7 crore we can take this much loan@10%
1.7/10 * 100 = 17 crore.

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