The Purpose of the Debt Covenant That Requires Maintaining a Minimum

question 58

Multiple Choice

The purpose of the 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) limit the annual cash dividends paid by the firm

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Definitions:

Previously Undisclosed Principal

A principal whose identity was not revealed by the agent at the time of entering into a contract with a third party.

Third Party

An entity that is not directly involved in a transaction or contract but may be affected by it or may have interests that are affected.

Constructive Notice

Notice of agency termination that is usually given by publishing an announcement in a newspaper.

Agency Termination

The act of ending the relationship between an agent and their principal, which can occur for various reasons including mutual agreement, achievement of the agency's purpose, or breach of contract.