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 $76 million. Fessenden's current level of equity is $450 million and its current level of interest-bearing debt is $574 million. Fessenden has a cash balance of $79 million. It will finance the acquisition with a 10-year bond of $76 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 eTextbook and Media :1 :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 Fessenden acquire Sonar Corporation.
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 $76 million. Fessenden's current level of equity is $450 million and its current level of interest-bearing debt is $574 million. Fessenden has a cash balance of $79 million. It will finance the acquisition with a 10-year bond of $76 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 eTextbook and Media :1 :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 Fessenden acquire Sonar Corporation.
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
Section: Chapter Questions
Problem 1PS
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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 $76 million. Fessenden's current level of equity is $450 million and its current level of interest-bearing debt is $574 million.
Fessenden has a cash balance of $79 million. It will finance the acquisition with a 10-year bond of $76 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
eTextbook and Media
:1
: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
Fessenden
acquire Sonar Corporation.
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