‘“Out on a limb, over his head’—that’s the typical reaction every time Rupert Murdock adds another debt-financed chunk to his global media colossus, News Corp. In the past five years, its reported assets have more than quadrupled [but Murdock is stepping] up to the plate again, with a $1.4 billion offer for MGA/UA Communications Co. . . Murdock is rapidly approach¬ ing limits on his ability to borrow. News Corp.’s ratio of debt to equity [is] .98, up from .70, and not far below the 1.1 ceiling imposed by the large group of banks that make up News Corp.’s chief source of borrowing. A News Corp. insider estimates the company has only about $1 billion in additional borrowing power under the bank covenants” (Business Week, October 2, 1989). REQUIRED:

a. Explain why Murdock’s financing needs are handled by a large group of banks, rather than a single bank, and why these banks would impose a ceiling on News Corp.’s debt/equity ratio. Chapter 1 1 Long-Term Liabilities: Notes, Bonds, and Leases 583

b. The article states further that the company’s “leverage may well be greater than [what is indicated by News Corp.’s debt/equity ratio].” Explain how this could be and how such a situation would affect the risk incurred by the banks who provide Murdock’s financing.

c. The article also states that “in evaluating properties [to acquire], Murdock considers their ability to generate cash ... as a far more important variable than their asset value.” Provide a plausible reason why Murdock would consider the investment’s ability to generate cash as so important.