Question
LT Enterprises has for several years enjoyed relatively easy access to the bond markets. Their President/CEO is wondering whether they may have taken too much
LT Enterprises has for several years enjoyed relatively easy access to the bond markets. Their President/CEO is wondering whether they may have taken too much advantage of their access and borrowed more than they should have.
LT's debt ratio is currently 68%. If it reaches 70%, holders of certain bonds will be able to force a conversion of their bonds to common stock. This will significantly dilute the ownership of several major investors. Their long-term debt is currently structured as follows:
$5,000,000 of 4.2%, 20-year bonds due in 2035, book value is $4,800,000
$8,000,000 of 4%, 20-year bonds due in 2036, book value is $7,510,000
$20,000,000 of 5%, 20-year convertible bonds due in 2037, book value is $17,800,000
$10,000,000 of 4.8%, 30-year bonds due in 2048, book value is $8,100,000
LT has a current cash balance of approximately $15,000,000, which is $8,000,000 more than they consider to be the minimum cash balance that allows them to carry on operations smoothly. There are no short-term investments. Their major lines of business all generate positive operating cash flows and are expected to continue to do so.
Required:
In preparation for next week's board meeting, the CEO has asked you to draft a plan to bring the debt ratio down below 40% in the next two years. Identify at least one approach that will reduce the debt ratio in two years. If there is additional information you need to formalize your plan, indicate what information you need.
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