Question

# Your firm successfully issued new debt last​ year, but the debt carries covenants.​ Specifically, you can...

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.

#### Homework Answers

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.

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