Which of the following is an example of an appropriate loan covenant?
A) The firm must increase its debt ratio by at least 10%.
B) The firm must reduce its total asset turnover by 10%.
C) The firm must purchase an insurance policy on a key employee.
D) All of these are examples of an appropriate loan covenant.

Question

Quizplus · Accepted Answer

An appropriate loan covenant should aim to protect the lender's interests and reduce the risk of default. Purchasing an insurance policy on a key employee would reduce the risk of the firm facing financial difficulty due to the loss of a key employee. Choices A and B are not appropriate because they place additional financial burdens on the firm, which could lead to financial distress and increase the risk of default.

Which of the Following Is an Example of an Appropriate