Which of the following would be considered a "negative" loan covenant?
A) The firm's current ratio cannot fall below 2.0
B) All property must be maintained in good condition
C) The firm's net worth must exceed $10,000,000
D) The firm must carry property insurance on all collateral.
E) Cash dividends cannot exceed 50% of earnings.

Question

Quizplus · Accepted Answer

A negative loan covenant is a restriction imposed by the lender that prohibits the borrower from taking certain actions. Option E, stating that cash dividends cannot exceed 50% of earnings, is a negative loan covenant that restricts the borrower's ability to distribute profits to shareholders. Options A, B, C, and D are all examples of positive loan covenants that require the borrower to maintain certain financial conditions or obligations.

Which of the Following Would Be Considered a "Negative" Loan