Reading 39 FSA

P 513 The required minimum level of stockholders’ equity was initially set at $ 650 mio at December 31,1993, increasing annually thereafter by 1) 50% of positive consolidated net income and 2) 50% of the proceeds (in excess of the first 50 million) of any incremental equity offering made after June 30, 1994. The company's total debt is limited to 2 055 mio. The Net Income 1994 is 48 mio The dividend capacity is 43.3 mio as of December 31, 1994 The Total stockholders’ equity in 1994 is 717 377 Question B State whether the debt covenants restrict the company’s ability to maintain its annual dividend through 1998. Justify your answer by preparing a schedule for the years 1995-1998 showing the company’s expected and minimum shareholders’ equity given current income and dividend levels. My question consists in the calculation of expected shareholders’ equity: My calculation for 1995: 717,377+48-43.3=722.07 the answer is for 1995: 717,377+48-42 (where does it come from???) =723.3

Is it a stupid question ?

no, it’s not a stupid question. In my 08 Schweser notes, there is no such complicated calculation sample, just some concept. In CFAI book, the sample is also simpler than this question. I guess it rare to test. anyway, will re-read this part, and try to give some thoughts later.

43.3 is the dividend capacity, 42 is the real dividend paid, both number were given in the first paragraph