Question

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 of 1.1. Your net income this year was $ 69.7 million. Your cash is $ 9.9 ​million, your receivables are $ 8.4 ​million, and your inventory is $ 5.2 million. You have current liabilities of $ 18.8 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 ​$ ----- million. 

Answer 1

Ans.

Quick Ratio = 1.1

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

1.1 = Current Assets - $ 5.2 / $ 18.8

Current Assets - $ 5.2 = $ 20.68

Current Assets = $ 20.68 + $ 5.2 = $ 25.88 million

Current Assets =  Cash + Receivables + Inventory - Current Liabilities + Net Income - Dividends

$ 25.88 = $ 9.9 + $ 8.4 + $ 5.2 - $ 18.8 + 69.7 - Dividends

Dividends = $ 74.40 - $ 25.88

Dividends = $ 48.52 million

The maximum dividend would be ​$ 48.52 million.