Your firm has tangible assets of 

​$104.9104.9 

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 

1.661.66. 

Your firm has a ratio of 

1.981.98 

and the target firm has a ratio of 

1.341.34. 

Can you take on any more debt in the acquisition without violating your​ covenant?

Question content area bottom

Part 1

The combined company 

▼
 
~FalseAnswer

can
 
take on more debt.  ​(Select from the​ drop-down menu.)\

To determine if the combined company can take on more debt without violating the merger & acquisition covenant, we need to calculate the **net tangible assets-to-debt ratio** for the combined firm and check if it meets the covenant requirement of 1.66.

### Step 1: Firm's current tangible assets and ratio
- Your firm's tangible assets: **$104.9 million**.
- Your firm's ratio: **1.98**.

Using the formula:

\[
\text{Net Tangible Assets-to-Debt Ratio} = \frac{\text{Net Tangible Assets}}{\text{Debt}}
\]

We can calculate your firm's current debt:

\[
\text{Debt} = \frac{\text{Net Tangible Assets}}{\text{Ratio}} = \frac{104.9}{1.98} \approx 52.96 \text{ million}.
\]

### Step 2: Target firm's tangible assets and ratio
The target firm is half your firm's size, so its tangible assets are:

\[
\text{Target firm tangible assets} = \frac{104.9}{2} = 52.45 \text{ million}.
\]

The target firm's ratio is 1.34, so its debt is:

\[
\text{Debt} = \frac{52.45}{1.34} \approx 39.15 \text{ million}.
\]

### Step 3: Combined firm's net tangible assets and debt
The combined firm's net tangible assets will be:

\[
\text{Combined tangible assets} = 104.9 + 52.45 = 157.35 \text{ million}.
\]

The combined firm's debt will be:

\[
\text{Combined debt} = 52.96 + 39.15 = 92.11 \text{ million}.
\]

### Step 4: Combined firm's tangible assets-to-debt ratio
Now, calculate the combined firm's ratio:

\[
\text{Combined ratio} = \frac{157.35}{92.11} \approx 1.71.
\]

### Step 5: Comparison with the covenant requirement
The covenant requires a minimum ratio of 1.66. Since the combined firm's ratio of 1.71 is **greater than 1.66**, the combined company can still take on more debt without violating the covenant.

### Answer:
The combined company **can** take on more debt without violating the covenant.

Would you like further details or have any questions? Here are some related questions to consider:

1. How would changes in the tangible assets of the target firm affect the combined ratio?
2. What would happen if the target firm's ratio were lower than 1.34?
3. How much additional debt can be taken on while still satisfying the covenant?
4. How does the size difference between the two firms impact the outcome?
5. What other financial ratios should be considered during a merger?

**Tip:** Always consider potential changes in asset values or debt structures post-acquisition, as they can affect covenant compliance.

Your firm has tangible assets of $104.9 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 1.66. Your firm has a ratio of 1.98 and the target firm has a ratio of 1.34. Can you take on any more debt in the acquisition without violating your covenant?

Analyze whether a combined company can take on more debt during a merger without violating a 1.66 tangible assets-to-debt ratio covenant. Learn how to calculate the combined firm's ratio using key formulas and financial concepts. Suitable for finance students and professionals.

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