Fessenden Corporation has accumulated a significant amount of debt as a result of debt-financed acquisitions of other companies. It is currently considering acquiring one of its competitors, Sonar Corporation. Fessenden's existing debt covenants stipulate that it cannot go beyond a debt to equity ratio of 1.25:1 and a net debt as a percentage of capitalization ratio of 0.90:1. The acquisition of Sonar will cost $86 million. Fessenden's current level of equity is $490 million and its current level of interest-bearing debt is $621 million. Fessenden has a cash balance of $82 million. It will finance the acquisition with a 10-year bond of $86 million that carries a 5% interest rate sold at par. Determine Fessenden's debt to equity ratio and net debt as a percentage of capitalization ratio prior to the proposed acquisition. (Round answers to 2 decimal places, e.g. 1.25.) Debt to Equity Net Debt as a Percentage of Total Capitalization :1 Determine whether Fessenden could acquire Sonar Corporation with the bond issue and still remain in compliance with the existing debt covenants. (Round answers to 2 decimal places, e.g. 1.25.) Debt to Equity Net Debt as a Percentage of Total Capitalization :1 :1 :1

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Fessenden Corporation has accumulated a significant
amount of debt as a result of debt-financed acquisitions
of other companies. It is currently considering acquiring
one of its competitors, Sonar Corporation. Fessenden's
existing debt covenants stipulate that it cannot go
beyond a debt to equity ratio of 1.25:1 and a net debt as
a percentage of capitalization ratio of 0.90:1. The
acquisition of Sonar will cost $86 million. Fessenden's
current level of equity is $490 million and its current level
of interest-bearing debt is $621 million. Fessenden has a
cash balance of $82 million. It will finance the acquisition
with a 10-year bond of $86 million that carries a 5%
interest rate sold at par.
Determine Fessenden's debt to equity ratio and net debt
as a percentage of capitalization ratio prior to the
proposed acquisition. (Round answers to 2 decimal
places, e.g. 1.25.)
Debt to Equity
Net Debt as a Percentage of Total
Capitalization
:1
Determine whether Fessenden could acquire Sonar
Corporation with the bond issue and still remain in
compliance with the existing debt covenants. (Round
answers to 2 decimal places, e.g. 1.25.)
Debt to Equity
Net Debt as a Percentage of Total Capitalization
:1
:1
:1
Transcribed Image Text:Fessenden Corporation has accumulated a significant amount of debt as a result of debt-financed acquisitions of other companies. It is currently considering acquiring one of its competitors, Sonar Corporation. Fessenden's existing debt covenants stipulate that it cannot go beyond a debt to equity ratio of 1.25:1 and a net debt as a percentage of capitalization ratio of 0.90:1. The acquisition of Sonar will cost $86 million. Fessenden's current level of equity is $490 million and its current level of interest-bearing debt is $621 million. Fessenden has a cash balance of $82 million. It will finance the acquisition with a 10-year bond of $86 million that carries a 5% interest rate sold at par. Determine Fessenden's debt to equity ratio and net debt as a percentage of capitalization ratio prior to the proposed acquisition. (Round answers to 2 decimal places, e.g. 1.25.) Debt to Equity Net Debt as a Percentage of Total Capitalization :1 Determine whether Fessenden could acquire Sonar Corporation with the bond issue and still remain in compliance with the existing debt covenants. (Round answers to 2 decimal places, e.g. 1.25.) Debt to Equity Net Debt as a Percentage of Total Capitalization :1 :1 :1
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