If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which of the following actions would help avoid a violation of the covenant?
A)Purchase long-term investments
B)Increase current cash dividends declared
C)Exchange bonds payable for common stock
D)Acquire money by selling land at its balance sheet value

Question

Quizplus · Accepted Answer

By exchanging bonds payable for common stock, the company can decrease its debt level (since bonds payable are a liability) and increase its equity. This will help bring its debt/equity ratio closer to the required level, avoiding a covenant violation. Purchasing long-term investments or acquiring money by selling land are not directly related to reducing debt, and increasing current cash dividends would decrease equity, making the debt/equity ratio worse.

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