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

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

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter26: Mergers And Corporate Control

Section: Chapter Questions

Problem 5P

See similar textbooks

Similar questions

Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank. The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the note payable on the date of restructuring is P2,200,000. What amount should be recognized as gain from debt extinguishment as a result of the "equity swap”? a. 400,000 b. 100,000 c. 500,000 d. 200,000
Thaler Inc. holds a $1 million receivable ($800,000 principal, $200,000 accrued interest) from Einhorn Industries, and agrees to settle the receivable outright for $900,000 given Einhorn’s difficult financial situation. How much gain or loss should Thaler recognize on this troubled debt restructuring?
Bloom Corporation purchased $1,750,000 of Taylor Company 5% bonds, at their face amount, with neither the intent nor the ability to hold the bonds until they matured in 2028, so Bloom classifies its investment as AFS. Unfortunately, a combination of problems at Taylor Company and in the debt securities market caused the fair value of the Taylor investment to decline to $1,200,000 during 2024. The following are the two alternative scenarios that should be analyzed independent of each other. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $550,000 decline in fair value, Bloom attributes $325,000 to credit losses, and $225,000 to noncredit losses. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $550,000 decline…
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank. The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the note payable on the date of restructuring is P2,200,000. What amount should be recognized as share premium from the issuance of the shares? a. 500,000 b. 100,000 c. 400,000 d. 200,000
In your answers to the following set of questions,assume that Ross Corporation has $200 millionof assets at book value, $150 million of liabilitiesowed to 500 different creditors, and $50 million ofcommon equity book value. Also, assume that Rosshas failed to make timely payments on its debt. The assets are worth less than the $200 millionshown on the balance sheet, although their actualmarket value is uncertain. The company issuedmortgage bonds that are held by public bondholders and are secured by real estate, and 15 differentbanks hold loans secured by all of the company’saccounts receivable, inventories, and equipment.There are also some 250 general (unsecured) creditors, including accounts payable, accrued wagesand taxes, and pension plan obligations. Answerthe following questions:a. Should Ross attempt to resolve its problemsusing informal procedures, or should it file forbankruptcy? Why?
Katrina & Co. has encountered financial difficulties and has become unable to retire its P1,500,000 bonds payable, as well as its accrued interest of P150,000. To renegotiate the liability, Katrina agreed with the creditor to settle the debt through exchange of equity securities. Katrina’s ordinary shares have a par value of P50 and are currently selling at P65. How much will Katrina record as gain on debt restructuring upon settlement of the bonds?
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
Bloom Corporation purchased $1,850,000 of Taylor Company 5% bonds, at their face amount, with the intent and ability to hold the bonds until they matured in 2025, so Bloom classifies its investment as HTM. Unfortunately, a combination of problems at Taylor Company and in the debt securities market caused the fair value of the Taylor investment to decline to $1,280,000 during 2021. The following are the two alternative scenarios that should be analyzed independent of each other. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $570,000 decline in fair value, Bloom attributes $335,000 to credit losses, and $235,000 to noncredit losses. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $570,000 decline in fair…
Financial Corporation wants to acquire Great Western Inc. Financial has estimated the enterprise value of Great Western at $104 million. The market value of Great Western’s long-term debt is $15 million, and cash balances in excess of the firm’s normal working capital requirements are $3 million. Financial estimates the present value of certain licenses that Great Western is not currently using to be $4 million. Great Western is the defendant in several outstanding lawsuits. Financial Corporation’s legal department estimates the potential future cost of this litigation to be $3 million, with an estimated present value of $2.5 million. Great Western has 2 million common shares outstanding. What is the value of Great Western per common share?
LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities held to maturity. The market price of Branch’s bonds fell by $450,000, due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED thinks it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for any credit or noncredit losses in the current period? How should the decline affect net income and comprehensive income?
LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities held-to-maturity. The market price of Branch’s bonds fell by $450,000 due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED thinks it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for any credit or noncredit losses in the current period? How should the decline affect net income and comprehensive income? General Journal What journal entries should LED record to account for any credit or noncredit losses in the current period? Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. No Transaction General Journal Debit…
In relation to a failed acquisition, a firm of accountants has invoiced ABC Co. for the sum of $300,000. ABC Co. has paid $20,000 in full settlement of the debt and states that this was a reasonable sum for the advice given and is not prepared to pay any further sum. The accountants are pressing for payment of the full amount but on the advice of its solicitors, ABC Co is not going to settle the balance outstanding. Additionally ABC Co is involved in a court case concerning the plagiarism of software. Another games company has accused ABC Co of copying their games software and currently legal opinion seems to indicate that ABC Co will lose the case. Management estimates that the most likely outcome will be a payment of costs and royalties to the third party of $1 million in two years’ time (approximately). The best case scenario is deemed to be a payment of $500,000 in one year’s time and the worst case scenario that of a payment of $2 million in three years’ time. These scenarios are…