Mitchell Energy and Development Corporation was one of the country’s largest oil and gas producers before it was purchased by Devon Energy. Some years ago, the notes to its financial statements revealed the existence of certain debt agreement restrictions on the level of consolidated stockholders’ equity as well as on various asset-to-debt ratios. These bank credit agreements required that consolidated stockholders’ equity be maintained at a level equal to at least $300,000,000 and also required the maintenance of specified financial and oil and gas reserve and/or asset value to debt ratios.
1. Given the existence of the asset-to-debt covenants, was Mitchell more likely to be able to enter into operating leases or capital leases without violating the covenants?
2. If Mitchell Energy and Development had refused to agree to these conditions at the time of the debt issues, how would it have affected the market price of the debt it issued?
3. Before being acquired, Mitchell issued 4.68 million additional shares at $53 per share. Give the journal entry to record the issue, assuming no par stock.
4. Devon Energy subsequently agreed to buy Mitchell Energy by giving each shareholder in Mitchell Energy $31 in cash and .585 shares of Devon Energy for each share of Mitchell Energy. Devon’s shares were valued at $50.76. How much profit would an investor who bought 1,000 shares of Mitchell Energy at $53 per share just before the acquisition make when the merger was complete?