The purpose of the restrictive debt covenant that imposes fixed assets restrictions 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 the firm from liquidation, acquisition, or encumbrance of capital assets.

Question

Quizplus · Accepted Answer

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to prevent the firm from liquidation, acquisition or encumbrance of capital assets. This helps protect the lenders' security investment and ensures that the borrower has enough capital assets to continue meeting their obligations. It does not limit the amount of fixed-payment obligations nor ensure a cash shortage does not cause inability to meet current obligations, so options B and C are incorrect.

The Purpose of the Restrictive Debt Covenant That Imposes Fixed