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has a ratio of 1.2:1. Can you acquire this firm (and thus take on more debt) without violating your covenant?

has a ratio of 1.2:1. Can you acquire this firm (and thus take on more debt) without violating your covenant?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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M4
Your firm has tangible assets of $100 million. You are planning to acquire a firm that is half your firm's size. You have bonds with a merger & acquisition covenant that requires the combined firm to have a minimum ratio of net tangible assets to debt of 1.5:1. Your firm has a ratio of 2:1 and the target firm has a ratio of 1.2:1. Can you acquire this firm (and thus take on more debt) without violating your covenant?
Transcribed Image Text:Your firm has tangible assets of $100 million. You are planning to acquire a firm that is half your firm's size. You have bonds with a merger & acquisition covenant that requires the combined firm to have a minimum ratio of net tangible assets to debt of 1.5:1. Your firm has a ratio of 2:1 and the target firm has a ratio of 1.2:1. Can you acquire this firm (and thus take on more debt) without violating your covenant?
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