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Bond covenants

A company has a large bond issue whose covenants require:
(1) That the company's interest coverage ratio exceeds 4.0
(2) That the company's ratio of tangible assets to long term debt exceeds 1.50
(3) That cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issuance of the bonds.

The company 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, the company has earned $200 million, paid dividends of $40 million, and repurchased $40 million of common stock.
Is this company in compliance with its bond covenants?

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Bond covenants
A company has a large bond issue whose covenants require:
(1) That the company's interest coverage ratio exceeds 4.0
(2) That the company's ratio of tangible assets to long term debt exceeds 1.50
(3) That cumulative dividends and share repurchases not exceed 60% of cumulative ...

Solution Summary

This solution is comprised of a detailed explanation to answer is this company in compliance with its bond covenants.

$2.19