If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which one of the following actions would increase the likelihood of violating the debt covenant?
A)Issuing capital stock
B)Skip current cash dividends
C)Acquire money by issuing a non-interest-bearing note payable
D)Acquire money by collecting accounts receivable

Question

Quizplus · Accepted Answer

Issuing a non-interest-bearing note payable increases the company's debt without increasing its equity, thus increasing the debt/equity ratio and making it more likely to violate the debt covenant. Options A, B, and D either increase equity or do not affect the debt/equity ratio directly in a way that would increase the likelihood of violating the covenant.

If the Maximum Debt/equity Ratio as Specified by a Debt