Often, the firm's ability to pay cash dividends is constrained by restrictive provisions in a loan agreement.

Question

Quizplus · Accepted Answer

Loan agreements often include restrictive covenants that limit a company's ability to pay dividends. These covenants typically aim to protect the lender's investment by requiring the borrower to prioritize debt payment and maintain certain financial ratios. A breach of these covenants may trigger default and lead to costly penalties, including the acceleration of the loan balance or a decrease in credit rating.

Often, the Firm's Ability to Pay Cash Dividends Is Constrained