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A company hasacovenanton its 5% long-term bond, stipulating thatits retained earnings must not fall below $2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. Itis currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directorsif the level of retained earnings will comply with the covenant?
Suggested Answer: C
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8 comments · newest first
CA
Carmela
12 months ago
I’m not so sure about that calculation.
RO
Ronnie
1 year ago
Definitely not breached if retained earnings are $4.68 million!
DO
Dominque
1 year ago
Wait, how can retained earnings be $4.68 million? That seems high!
CO
Corrinne
1 year ago
I think the retained earnings will be fine with a 4% growth.
AV
Avery
1 year ago
The bond is trading at 80% of its nominal value.
BE
Bernardo
1 year ago
I'm a bit confused by the question. The connection table data doesn't seem to directly point to the solution. I'll need to carefully read through the details and try to connect the dots.
CE
Celestina
1 year ago
I thought it might be "C" for Interior, but now I'm questioning that since Interior doesn't really encompass the whole operation.
KI
King
1 year ago
Based on my understanding of collective bargaining, I believe rights arbitration is a formal hearing between the union and management to resolve disputes over the interpretation or application of an existing contract. So option C seems like the most accurate description.