The purpose of the restrictive debt covenant that requires maintaining a minimum level of net working capital is to
A) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives.
B) limit the amount of fixed-payment obligations.
C) ensure a cash shortage does not cause an inability to meet current obligations.
D) prevent liquidation of assets through large salary increases of key employees.

Question

Quizplus · Accepted Answer

The purpose of a restrictive debt covenant requiring the maintenance of minimum net working capital is to ensure that a company has enough cash to meet its current obligations, regardless of short-term cash shortages. This protects the lender by reducing the risk of default and helps the company to operate smoothly without facing a liquidity crisis. Option A is related to marketability of securities and is not directly related to net working capital. Option B is related to payments, whereas net working capital is more about maintaining liquidity of current assets. Option D is not related to net working capital.

The Purpose of the Restrictive Debt Covenant That Requires Maintaining