A1. (Bond Covenants)
Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)
Individual assignment: Text Problem Set IV:
Chapter 20, Problems
A1. (Bond Covenants) Dallas Instruments has a large bond issue whose covenants require: (1)that DI's interest coverage ratio exceeds 4.0; (2) that DI's ratio of tangible assets to long term debt exceeds 1.50; and (3) that cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issuance of the bonds. DI has earnings before interest and taxes of $70 million and interest expense of $14 million. Tangible assets are $400 million and long-term debt is $175 million. Since the bonds were issued, DI has earned $200 million, paid dividends of $40 million, and repurchased $40 million of common stock. Is DI in compliance with its bond covenants?
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