Question

Your firm has tangible assets of $98 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 1.7. Your firm has a ratio of 2.1 and the target firm has a ratio of 1.3. Can you take on any more debt in the acquisition and not violate your covenant?

Answer 1

To determine if you can take on more debt in the acquisition without violating the covenant, you need to calculate the net tangible assets and debt for the combined firm and compare it to the minimum ratio required by the covenant.

Step-by-step explanation:

According to the information provided, your firm has tangible assets of $98 million and you are planning to acquire a firm that is half your firm's size. The merger & acquisition covenant requires a minimum ratio of net tangible assets to debt of 1.7. Currently, your firm's ratio is 2.1 and the target firm's ratio is 1.3.

To determine if you can take on more debt in the acquisition without violating the covenant, you need to calculate the ratio for the combined firm. To do this, you need to calculate the total net tangible assets and total debt for the combined firm. If the ratio is above 1.7, you can take on more debt without violating the covenant.