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A company has in a 5% corporate bond in issue on which there are two loan covenants.
* Interest covermust not fall below 3 times
* Retained earnings for the yearmust not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
Suggested Answer: C
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34 comments · newest first
LU
Luis
10 months ago
10% dividend increase seems risky with those covenants.
HE
Herminia
10 months ago
I think they’ll breach the retained earnings covenant.
IS
Isabelle
10 months ago
The interest cover is crucial for compliance.
GL
Gladys
11 months ago
Not sure they can manage both covenants next year.
HU
Hubert
11 months ago
They should be fine with both covenants, right?
DY
Dyan
11 months ago
I think the interest cover should be fine, but I'm a bit confused about how the dividend increase affects retained earnings.
ME
Mertie
11 months ago
I feel like the retained earnings might be a problem, especially with the dividend increase. But I can't recall the exact numbers we used in class.
DO
Doyle
12 months ago
This question seems similar to one we practiced where we had to analyze covenants. I think I need to double-check the projected earnings.
BR
Brandon
12 months ago
I remember we discussed how to calculate interest cover, but I'm not sure about the retained earnings part.
GL
Glory
12 months ago
Right, and the question gives us the dividend per share and says they're increasing it by 10%, so we can use that to estimate the earnings.
AD
Adolph
1 year ago
I think so. We have the bond interest rate and the number of shares, so we can figure out the total interest expense. Then we just need to project the earnings for next year.
CA
Caprice
1 year ago
I'm a bit confused about how to calculate the interest cover. Do we have all the information we need for that?
ME
Merrilee
1 year ago
Okay, let's break this down step-by-step. We need to calculate the interest cover and retained earnings, then compare them to the covenants.
RI
Ria
1 year ago
This question looks straightforward, but I want to make sure I understand all the details before answering.
LA
Laura
1 year ago
Seriously, who comes up with these exam questions? It's like they're trying to trip us up. I bet the answer is D, just to keep us on our toes.
GR
Gregoria
1 year ago
Ooh, I love a good financial puzzle! Let me break out my spreadsheet and crunch some numbers. This is going to be fun!
CO
Cordelia
1 year ago
User 3: Let's see if the company will be in compliance with the loan covenants next year.
ER
Erick
1 year ago
User 2: I'm ready to crunch some numbers.
GE
Geoffrey
1 year ago
User 1: Looks like we have a financial puzzle to solve!
JO
Jody
1 year ago
This question is making my head spin. Can we get a calculator up in here? I'm just going to guess and hope for the best.
KI
Kiera
1 year ago
I agree, the financial projections look good for next year.
RO
Roy
1 year ago
I think the company will be in compliance with both covenants.
AN
Anglea
1 year ago
I don't know, that 10% dividend increase sounds a bit too good to be true. I'm going to go with option C and say the company will breach the retained earnings covenant.
PA
Pansy
1 year ago
Wait, what's this about interest cover? I thought we were talking about bonds. This exam question is really testing our financial knowledge.
DA
Darrel
1 year ago
So, based on the financial projections provided, do you think the company will be able to meet the interest cover covenant next year?
TR
Trinidad
1 year ago
Yes, that's right. In this case, the company must maintain an interest cover of at least 3 times to comply with one of the loan covenants.
CR
Cruz
1 year ago
Interest cover is a ratio that measures a company's ability to pay interest expenses on its debt. It's important for bondholders to know if the company can meet its interest obligations.
BA
Barabara
1 year ago
I'm not so sure, I think the company will breach the covenant in respect of interest cover only.
BR
Brunilda
1 year ago
Hmm, this seems straightforward. I'm leaning towards option A, the company will be in compliance with both covenants.
JE
Jesusa
1 year ago
Let's hope the financial projections hold true for next year.
AM
Amos
1 year ago
The increase in dividends should help maintain compliance with the covenants.
DI
Dierdre
1 year ago
I agree, option A seems like the most likely outcome.
DE
Detra
1 year ago
I agree with Oliva, the financial projections seem to support that.
OL
Oliva
1 year ago
I think the company will be in compliance with both covenants.