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A company has a covenant on its 5% long term corporate bond.
* Covenant - The earnings must not fall below $7 million
The bond has a nominal value of $60 million.
It is currently trading at 80% of its nominal value.
The projected earnings before interest and taxation for next year are $11.5 million.
The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?
Suggested Answer: C
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12 comments · newest first
MI
Mila
12 months ago
Just to clarify, they need to maintain above $7 million, right?
NE
Nelida
12 months ago
I think A is a bit misleading, earnings will be higher than that.
BU
Buck
1 year ago
Wait, how can they go from $11.5 million to $6.8 million? Sounds off.
HA
Hana
1 year ago
Definitely going with option B!
CO
Cora
1 year ago
The projected earnings are $11.5 million, so the covenant won't be breached.
MI
Milly
1 year ago
I'm a bit confused about the tax impact; I thought we had to deduct taxes before checking the covenant, but I'm not sure how that plays into the options.
IL
Iluminada
1 year ago
I practiced a similar question where we had to determine if earnings met a covenant, and I think option B makes the most sense here.
MA
Marilynn
1 year ago
I think the projected earnings are $11.5 million, so the covenant should be fine, but I can't recall if we need to consider anything else.
DE
Denna
1 year ago
I remember we discussed how to calculate retained earnings after tax, but I'm not entirely sure how that affects the covenant.
OZ
Ozell
1 year ago
I'm leaning towards the Cloud event integration role. It seems like it would be designed specifically for handling cloud-related events and alerts.
RO
Rosamond
1 year ago
I'm not sure about this one. I'll have to review my notes on data set types to figure out the answer.
VA
Val
1 year ago
I'm a bit confused by the different graphics mode options. Can someone help me understand the differences between "Build to Lossless" and "Always Lossless"? I want to make sure I pick the right one for this scenario.