Project Doverline — Debt vs. Equity for a Capex Program
A 1-hour Financing Decision / Capital Structure case study with a complete model answer
The Situation
0 route-miles of electrified main line carrying intercity passenger and intermodal freight traffic between four metropolitan areas. It is the only rail operator on the corridor and the only continuous route between the end points.
Doverline Rail Corporation
- Sector
- Freight and passenger rail — a single electrified main-line corridor carrying intercity passenger and intermodal freight traffic
- Size
- Geography
- United States; one corridor connecting four domestic metropolitan areas
- Ownership
- Situation
The Prompt
You are an analyst supporting Doverline Rail Corporation on the financing of the Corridor Renewal Program.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 60 minutes.
PART 1
Sources and Uses at close
PART 2
Operating Scenarios
PART 3
Financial Projections
PART 4
Debt Schedule
PART 5
Credit Statistics
PART 6
Covenant Compliance
PART 7
Covenant Breakeven
PART 8
The written recommendation
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished Excel model is in the solution set below.
- 01
Read the term sheet before you touch the template
- 02
Build the raise once and let everything read from it
- 03
One scenario switch, one projection column
- 04
Treat the debt schedule as a waterfall, in order
- 05
Compute every test, not the one that comes to hand
- 06
Solve the breakeven, then write the paragraph
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Maintenance covenants versus incurrence tests
A maintenance covenant is tested on a schedule whether or not the company does anything, and failing it is a default. An incurrence test is only measured when the company wants to take an action — usually borrowing more — and failing it does not default anything; it simply blocks the action. The distinction decides what a breach costs. It also decides how much protection a covenant-light instrument really gives away, and for an issuer with years of program still to fund, being blocked from borrowing is not a harmless outcome.
Credit statistics on four bases
Leverage measures how much was borrowed against earnings. Net leverage nets the cash off. Interest coverage asks whether earnings service the coupon. Debt service coverage asks whether cash services everything contractually due in the year, which can include far more than interest depending on how the agreement defines it. A fixed-charge coverage ratio adds capital expenditure and cash taxes to the picture. They are not substitutes for one another, and for a capital-intensive issuer mid-program they can be a long way apart at the same moment.
Mandatory amortization and the cash flow sweep
Amortization is principal the borrower must repay on a fixed schedule — here 5.0% of original principal a year, so the step-down is equal every year rather than shrinking with the balance. A sweep is principal the borrower must repay out of whatever cash is left after everything else, at a stated percentage. Both retire debt, but only one of them is contractual in a year the company would rather keep the cash, and only the tranches that permit prepayment can be reached by a sweep at all.
A floating-rate floor
A floor sets a minimum for the reference rate used to price a floating tranche, regardless of where the market rate actually sits. When the quoted curve opens below the floor, the floor is what you pay, and only once the curve rises above it does the loan behave like a floating instrument again. Modeling the spread over the raw curve and skipping the floor understates the early years — which are exactly the years a new borrower has the most debt outstanding and the least headroom.
Adjusted EBITDA and the add-back basket
Credit agreements define the EBITDA their ratios are struck on, and permit named add-backs inside a cap — 15.0% of Adjusted EBITDA here, against $110.0mm of add-backs on Doverline's 2026A results. Ask of each item whether it is a cost that happened once and will not recur, or a saving the company expects and has not yet realized, because a lender who strikes one of them out is underwriting a different leverage number from the one on the page. Note too that stock-based compensation, which the agreement would allow as an uncapped non-cash add-back, is charged here rather than added back — a disclosure point worth making out loud.
Covenant headroom and covenant breakeven
Headroom is the distance between where a ratio actually sits and where the covenant sets the limit, stated in the units of the test. Breakeven turns that into something comparable across tests: the percentage fall in earnings that would consume the headroom entirely. Headroom in turns tells you which test is closest today; breakeven in percent tells you which test is closest to failing, and those are not always the same test, because a turn of leverage and a turn of coverage are not the same distance.
The cost of each currency
Debt costs its rate less the tax shield. Equity costs a share of the company's earnings — read as an earnings yield, the reciprocal of the price/earnings multiple, which at a low multiple is expensive money. Balance sheet cash costs the interest it stops earning. Pricing all three on a consistent after-tax basis is the first half of a financing decision, and the honest version of the answer says out loud that it is only the first half: cost tells you what the money charges, not what the documentation it arrives with will let you do.
Beginning-of-period interest
Charging interest on the balance at the start of the year rather than the average balance breaks the circular reference between interest, cash flow, debt repayment and interest in the formula itself, rather than by switching iterative calculation on. It is slightly conservative in a year of heavy repayment and it is what almost every credit model under time pressure does. Say that you have done it and why; an interviewer wants to know the simplification was a choice.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: Excel model, built the way a banker would actually build it. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —After-tax cost of debt against the cost of equity
- —Sources and uses and pro forma capitalization by tranche
- —Debt schedule with amortization, a cash sweep and a floating-rate floor
- —Credit statistics on four bases against a maintenance covenant package
- —Maintenance covenants against an incurrence test
- —Four-scenario stress testing and covenant breakeven analysis
- —Recommending a financing mix and the terms to change
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and Memo (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Doverline — Debt vs. Equity for a Capex Program
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a debt-versus-equity financing case in an investment banking interview?
A timed exercise in which you are handed a company, a funding need, two or three financing options on indicative terms and a partially built model, then asked how the money should be raised. You build the operating projections, a debt schedule for each tranche, the resulting credit statistics and the covenant tests, and you write a short recommendation. It is a capital markets and leveraged finance staple because it grades two things at once: whether you can build a credit model quickly, and whether you can read a term sheet as a set of constraints rather than a list of prices.
How do you get through seven tabs and ten projected years in sixty minutes?
By treating it as a small number of distinct formulas filled across a large number of cells. One projection column copied right, one tranche block copied down for the other three, one ratio row per statistic. Parameterize the financing mix in Sources and Uses so re-running the structure is a change to two cells and not a rebuild, anchor your assumption references before you fill rather than after, and leave the breakeven column to a formula rather than a goal-seek. Partial completion is a real outcome here and it is graded as such, so build in the order the template's Cover sets rather than perfecting the first tab.
Is the cheapest source of capital always the right one?
No, and this case exists to make you prove it either way rather than assume it. Cost is one input: an after-tax rate against an earnings yield, on a balance sheet with a stated amount of capacity. The other inputs are the documentation the money arrives with — what has to be repaid and when, what can be prepaid, what is tested and how often, and what happens to the company's ability to keep funding the program if a test is failed. A financing recommendation that quotes only the rate has answered the easy half.
Why does the model project ten years rather than five?
Because the construction program runs ten years and the instruments run ten years, and a five-year window would end before either the spending or the debt does. The point of the projection is to see the whole life of the commitment: the years when the program is spending heavily and returning nothing, the ladder of existing bond maturities falling due alongside it, and what the balance sheet looks like in the year the program finally completes. Truncating the window truncates the question.
What is the difference between a maintenance covenant and an incurrence test here?
The term loans carry four maintenance covenants tested every year, and failing any of them is an event of default regardless of what the company did or did not do. The subordinated notes carry a single maintenance test plus a fixed-charge coverage incurrence test at 2.00x, measured pro forma only when the company wants to borrow more. The incurrence test cannot cause a default — it can only stop the company raising further debt, which for an issuer with most of a construction program still to fund is a constraint with real teeth even though nothing about it is a breach.
What separates a strong candidate from an adequate one?
Both build a projection and both compute leverage. The difference shows in five places: reading the credit agreement's own ratio definitions instead of using the standard ones from memory, parameterizing the financing mix so the structure can be re-run in seconds, applying the rate floor rather than the raw curve in the early years, testing every covenant in every scenario rather than the one that came to hand, and writing a recommendation that names the binding constraint, quantifies the fall in earnings that trips it, and proposes specific terms with a value attached to each. The last of those is the one most candidates run out of time for, and it is the one the exercise is actually built to grade.
About This Financing Decision / Capital Structure Case Study
Financing Decision / Capital Structure case study for investment banking interviews. 60-minute format covering after-tax cost of debt against the cost of equity, sources and uses and pro forma capitalization by tranche, debt schedule with amortization, a cash sweep and a floating-rate floor. Includes the full prompt, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Debt Capital Markets. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
60-Minute Format
The time limit a real assessment would give you
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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