2.2·5 min read

Sizing the Debt

Leverage is quoted in turns of EBITDA. More debt shrinks the equity check and lifts returns - up to the limit lenders allow.

By the end you can

✓Express leverage in turns of EBITDA
✓Explain the risk/return tradeoff of more debt

\text{Debt} = \text{Leverage (turns)} \times \text{EBITDA}

e.g. 5.0x leverage on $100 of EBITDA = $500 of debt.

More leverage cuts both ways

Higher means a smaller and bigger returns if things go well - but a thinner cushion and real default risk if EBITDA stumbles. Lenders cap at what the cash flows can safely cover.

Check yourself

EBITDA is $120 and the deal is levered 5.5x. How much debt is raised?