Which of the following is an example of an appropriate loan covenant?
A)The firm must increase its debt ratio by at least 10 percent.
B)The firm must reduce its total asset turnover by 10 percent.
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 reduce the lender's risk of default and ensure the borrower's ability to repay the loan. Option A is not appropriate as it requires the firm to take on more debt, which increases the risk of default. Option B is not appropriate as it requires the firm to reduce its turnover, which could adversely affect its ability to generate cash flow. Option C, on the other hand, is appropriate as it helps mitigate the risk of losing a key employee and potentially facing financial difficulties as a result.

Which of the Following Is an Example of an Appropriate