RE:EBITDA or Net Earnings?sunshine7 wrote: Is interest or investment income/loss important driver of share price? IMO while excessive debt is undesirable (MT understands this), manageable debt or investments are a driver of growth for many companies. For example, if you had a guaranteed formula to return on capital of 40% per annum and you had $100k of your own money and an offer to loan to you another $300k at 7%, would you take the loan and invest it or take the 'safe' path? My advise is to take the loan and you will infinitely wealthier in year 1, 2 and forever. CXR total interest costs are around $250M (they had loans before the acquisition) which can be paid from cash flows of ~$600M. As the $180M bridge loans at 9.5% are paid down ( job #1), the blended rate drops and therefore the credit costs. At that point, CXR debt load should be seen as manageable and prudent by most analysts.
Sunshine,
I am not exactly sure what you are asking, but valuations can be done on both an unlevered, or a levered basis. Without getting into all of the theory, both methods will result in the same value conclusion. Assuming you are using a capitalized earnings approach, one method uses earnings before interest and one method uses earnings after deducting interest expense. The capitalization rates used are different - that is the key. As far as your question about borrowing goes: There exists an optimal level of interest-bearing debt that will optimize equity value. Again, not to get into the theory too much, you are correct: All other things being equal, the equity shares of an appropriately levered company will be worth more than if it were unlevered (had no interest-bearing debt). i hope this helps.