The pricetobook ratio is the market price per share

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Unformatted text preview: D12–6 The case describes a typical scenario that usually occurs while enforcing the debt covenant restrictions. Many times such agreements or decrees explicitly specify how changes in the key performance indicators will be treated due to an unanticipated change in the accounting standards. In the current case it is not clear whether any such clause exists that deals with the effect of change in net worth due to an unforeseen accounting standard. From the perspective of an executive of Westinghouse, the company should not be forced to place the $325 million in the escrow account due to the following reasons: (1) Westinghouse’s net worth dipped below $1.9 billion due to a new method of accounting mandated by FASB. The decline was entirely due to factors beyond Westinghouse’s control. (2) The new method of accounting merely creates an additional expense and an additional liability on the books of the company. It does not impact the current cash flow situation. Therefore, there is no change in the economic situation of West...
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