Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can...
Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can only pay dividends out of earnings made after the debt issue and you must maintain a minimum quick (acid-test) ratio
left parenthesis Current Assets minus Inventory right parenthesis divided by Current Liabilities(Current Assets−Inventory)/Current Liabilities
of 1.1. Your net income this year was $70.5 million. Your cash is $9.6 million, your receivables are $7.8 million, and your inventory is $5.4 million. You have current liabilities of $19.3 million. What is the maximum dividend you could pay (in cash and in stock) this year and still comply with your covenants?
The maximum dividend would be
$nothing
million. (Round to one decimal place.)
Homework Answers
Quick Ratio = 1.1
=> (Current Assets - Inventory) / Current Liabilities = 1.1
=> Current Assets = 1.1 x Current Liabilities + Inventory = 1.1 x 19.3 + 5.4 = $26.63 million
=> Cash + Receivables + Inventory - Current Liabilities + Net Income - Dividends = 26.63
=> Max Dividends = 9.6 + 7.8 + 5.4 - 19.3 + 70.5 - 26.63 = $37.37 million
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