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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