Stochastic Paths for EBTIDA – Pricing Debt – Rating – D/EBTIDA Multiple

• Consensus + past volatility AR1.
• Pure AR1.
• Jump + AR1.
• Mean Reversion.
• Multiple regression and then taking AR1 for each factor that the EBTIDA depends on, for example if there are four factors like Margin, Sales, Capex… find the AR1 model / applicable model and then draw EBITDA from there.
• Logistic regression on growth (Yes/ No) if yes how much.

Along with these, many more.......

Based on the above factors for the company or the sectors we can predict the EBITDA and take current Debt to find out where the D/EBITDA multiple would move. Seemingly wrong model can give us an overvalued projection.

Debt that a company takes is callable convertible and hence it has an option to convert and call… In that case the cost of debt would differ and the IRR for the company would change.

Debt options in convertible are many, but it is interesting to note that share price may trigger convert whereas dividend or other ways to return capital don’t. Getting cash would require making BS and NI, both of which would move into accounting. Once the ratio is checked we need to check the dilution using Black Scholes Model, where a company would hedge its risk on a convertible bond (not keeping it callable or keeping it callable for duration). If the conversion is optional at the end and the price is reached, than conversion causing dilution should be checked with hedges that are taken. In this regard both MC on stock price, E/EBTIDA, and BS for pricing of call option (that a company would purchase needs to be calculated). BS model would land us with price of the hedge moreover since our analysis is focused on share price and we keep the volatility same we can use the Merton model to find out the bond pricing as well as the PoD would change as stock price will move away, again the volatility of the stock would be calculated on a daily basis whereas the price will be calculated using our MC simulation. This would give us the implied PoD which can be used to model cost of debt. The other way to check if the multiple falls beyond a range where it would be tough for us to maintain the rating.