Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Accounting Basics Expert

Q1) O'Dowell Tool and Machine Company is about to sell $100 million issue of bonds. Covenants on loan need that O'Dowell maintain coverage of its interest plus sinking fund of 2.5 to 1 (remember, sinking fund payment is same as a principle payment). Bonds are to be retired over next 20 years by equal yearly sinking-fund payments and carry an interest rate of 10% per year. Compute the lowest level to which O'Dowell's EBIT can drop in first year the bonds are issued without violating covenants of loan? O'Dowell's tax rate is 40%.

Remember, interest is paid in before-tax dollars where as sinking fund payments are made in after-tax dollars. Each dollar of interest payment needs just one dollar of EBIT to cover it, but to pay dollar in sinking-fund payment in after-tax dollars requires $1.67 of EBIT [before-tax dollars]. After paying 40% tax on $1.67, there will be $1.00 left to cover sinking fund. Hence, to cover one dollar of interest plus one dollar of sinking fund would need $2.67 of EBIT ($1.00 for interest plus $1.00 times 1.67 for sinking fund payment); to cover one dollar of interest plus $0.50 of sinking fund payment would need $1.84 of EBIT.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M920420

Have any Question? 


Related Questions in Accounting Basics

Question 1how would outstanding checks be handled when

Question 1 How would outstanding checks be handled when reconciling the ending cash balance per the bank statement to the correct adjusted cash balance? A. They would be added to the balance of the bank statement. B. The ...

Valley care medical center expects projects x and y to

Valley Care Medical Center expects Projects X and Y to generate the following cash flows:   Givens (in '000s) Years                  0 1 2 3 4 5 1 Initial investment                              ($7,500)       2 Net oper ...

Company annual report study -choose any company and make a

COMPANY ANNUAL REPORT STUDY - Choose any company and make a report: Introduction (about 100 words) Conceptual framework (300 words) Ethics (not more than 150 words) Corporate governance (not more than 150 words) Legitima ...

Almas recording studio rents studio time to musicians in

Alma's Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipate ...

Assignment research applicationin this assignment you will

Assignment: Research Application In this assignment, you will use the Internet and other sources to gather and interpret information related to service and manufacturing organizations. Select either a service or a manufa ...

Assignmentattn ashok -find the interest rate on a loan

Assignment Attn: Ashok -Find the interest rate on a loan charging $912 simple interest on a principal of $4750 after 6 years. Find the principal of a loan at 6.2% if the simple interest after 5 years 6 months is $2387. H ...

Accounting discussion questionbulluse the internet to

Accounting Discussion Question • Use the Internet to research an annual report of a retail company. • Then, imagine you are an investor or creditor; suggest the ratios that you believe would provide an investor or credit ...

The purpose of an assignment is to ensure that the learner

The purpose of an assignment is to ensure that the Learner is able to: - Demonstrate an understanding of accounting principles. - Systematically record the financial aspects of business transactions. - Prepare financial ...

Course project a financial statement analysisa comparative

Course Project: A Financial Statement Analysis A Comparative Analysis of Nike, Inc. and Under Armour, Inc. Below is the link for the financial statements for Nike, Inc. for the fiscal year ending 2014. First, select 2014 ...

Problem -using the following proforma information regarding

Problem - Using the following proforma information regarding GE, Inc. based on analysts' forecast in early 2016:   2016E 2017E Next 3 years EPS 1.29 1.56 Growth at 7.59% DPS 0.92 1.11 Growth at 10% The book value of GE's ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro