To estimate the amount of debt a company could issue in a merger, which approach aligns with the described method?

To estimate the amount of debt a company could issue in a merger, which approach aligns with the described method?

• A. Use the target’s current debt load as a baseline
• B. Use the combined company’s LTM EBITDA and apply the median Debt/EBITDA from comparables
• C. Use the acquirer’s existing leverage and scale it by size
• D. Use a fixed industry-wide Debt/EBITDA limit

Answer: (B)

This item tests how to estimate post-merger debt capacity by tying leverage to a market-based multiple of EBITDA for the combined entity. Using the combined company’s LTM EBITDA as the base reflects the actual operating scale and cash-flow proxy of the merged entity, including recent performance. Applying the median Debt/EBITDA from comparables then provides a market-consistent benchmark for how much debt the merged group can sustainably support, avoiding outlier moves and capture typical risk levels in the sector. Using the combined EBITDA keeps the analysis grounded in reality for the post-merger entity, rather than relying on the target’s older debt load, the acquirer’s current leverage scaled by size, or a fixed industry cap that ignores deal-specific risk and potential synergies. That balance—current operating performance plus a market-based leverage target—explains why this approach is the best fit.

This item tests how to estimate post-merger debt capacity by tying leverage to a market-based multiple of EBITDA for the combined entity. Using the combined company’s LTM EBITDA as the base reflects the actual operating scale and cash-flow proxy of the merged entity, including recent performance. Applying the median Debt/EBITDA from comparables then provides a market-consistent benchmark for how much debt the merged group can sustainably support, avoiding outlier moves and capture typical risk levels in the sector.

Using the combined EBITDA keeps the analysis grounded in reality for the post-merger entity, rather than relying on the target’s older debt load, the acquirer’s current leverage scaled by size, or a fixed industry cap that ignores deal-specific risk and potential synergies. That balance—current operating performance plus a market-based leverage target—explains why this approach is the best fit.