Where There Are Debt Covenants in Place to Restrict the Level

question 27

Multiple Choice

Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:

• A) Avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit.
• B) Undertake revaluations where the expectation is that asset values have fallen.
• C) Avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant.
• D) Undertake revaluations where the expectation is that asset values are rising.
• E) None of the given answers.

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Definitions:

Long-Run Monopolistically Competitive Equilibrium

The condition in which firms in a monopolistically competitive market earn just enough revenue to cover all costs, including a normal profit, in the long term.

Enter Market

The act of beginning to offer goods or services in a particular marketplace.

Exit Market

The act of leaving a market or discontinuing the production and sale of a product or service, often due to unprofitability or strategic realignment.

Profits Eliminated

A situation where competition or other factors reduce a firm's profits to zero over time.