Problem:
Dallas Instruments has a large bond issue whose covenants require:
(1) that DI's interest coverage ratio exceeds 4.0;
(2) that DI's ratio of tangible assets to longterm debt exceeds 1.50; and
(3) that cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issuance of the bonds.
DI has earnings before interest and taxes of $70 million and interest expense of $14 million. Tangible assets are $400 million and long-term debt is $175 million. Since the bonds were issued, DI has earned $200 million, paid dividends of $40 million, and repurchased $40 million of common stock. Is DI in compliance with its bond covenants? Why or Why Not?