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

(Current Assets−Inventory)/Current Liabilities

of 1.2. Your net income this year was $ 70.4 million. Your cash is $ 9.6 ​million, your receivables are $ 8.4 ​million, and your inventory is $ 5.1 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?

What is the maximum dividend in millions rounded to 1 decimal place?

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Answer #1

Quick​ (acid-test) ratio = (Current Assets - Inventory)/Current Liabilities

1.2 = (Current Assets - $5.1 million) / $18.8 million

$22.56 million = Current Assets - $5.1 million

Current Assets = $22.56 million + $5.1 million = $27.66 million

Cash + Receivables = $27.66 million

Cash + $8.4 million = $27.66 million

Cash = $27.66 - $8.4 million = $19.26 million

Cash Required = $19.26 million - $9.6 million = $9.66 million

Maximum Dividend = Net Income - Cash Required

= $70.4 million - $9.66 million = $60.74, or $60.7 million

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