12.1.1.1. Debt Capacity, Equity Contribution, and Maximum Purchase Price
The exam may require you to know how to use some of the key figures that go into analyzing a potential M&A transaction, including:
Debt capacity. The maximum leverage (debt) that an acquirer is willing and able to accept to make the deal work. It is often expressed as a multiple of the target’s EBITDA. For example, in a prospective M&A transaction in which your client would be the acquirer, the client may tell you that leverage cannot exceed 5x EBITDA. This means that it will only go forward with the acquisition if the amount of debt financing is less than or equal to five times the target’s EBITDA.
Equity contribution. The portion of the target’s purchase price that the acquirer pays out of its own pocket, often expressed as a percentage of the purchase price. In the ideal case where the target’s pre-existing debt is entirely paid off at the time of acquisition, the equity portion of the target’s new capital structure equals the amount of the acquirer’s equity contribution. If you know the equity contribution as a percentage and the dollar amount of the debt financing, you can calculate