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07agency excel - firm cannot pay dividends for the first...

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B/S before issuing preferred stock B/S after issuing preferred stock Total asset  $370  Debt  $270  Total asset 393 Debt  $270  Equity  $100  Equity  $100  preferred  $23  D/E ratio 2.7 D/E ratio 2.2 B.S for the 1st quarter of 1999 B/S if preferred stockholders take all investment back Total asset  $467  Debt  $270  Total asset  $444  Debt  $270  New debt  $74  New debt  $74  Equity  $100  Equity  $100  preferred  $23  preferred  $-    D/E ratio 2.8 D/E ratio 3.4 Note: Now if all the preferred stockholders want their investment back and they will probably do because the
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Unformatted text preview: firm cannot pay dividends for the first quarter of 1999. (not allowed because D/E is 2.8 >2.5) all $23 equity is gone from the B/S, and D/E ratio will go up to 3.4, which exceeds the threshold in the debt covenant. According to the debt covenant, the bondholders will want the principal back immediately. If the L-T debt was originally due in 10 years, now it is due in May (in a month). And this debt need to be reclassified as curret debt....
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