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A debt issue contains a dividend limitation. Cumulative dividends cannot exceed the sum of $25 million and 60% of cumulative net income since the debt was issued three years ago. The firm earned $50 million net income in each of those years. It paid total dividends of $15 million and $20 million the past two years and $25 million so far this year. How large a dividend could the firm pay at the end of the third year without violating the dividend limitation?

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Solution Summary

The solution explains how to determine the maximum amount of dividends that can be paid under the bond covenant.

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The total amount of dividends that can be paid = 25 + 60% of cumulative ...

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