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Ratios To Meet Bond Covenants

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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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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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Let's examine the covenants one at a time.

(1) that DI's interest coverage ratio exceeds 4.0

Earnings before interest and taxes $70,000,000
Interest expense $14,000,000
Interest coverage ratio 5.0 ($70,000,000/$14,000,000)
Minimum for compliance ...

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