The Purpose of the Restrictive Debt Covenant That Imposes Fixed

question 146

Multiple Choice

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.

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Definitions:

Fixed Costs

Expenses that do not fluctuate with changes in production level or sales volume, such as rent or salaries.

Short Run

A period in economic analysis during which some factors of production are fixed, affecting production and cost decisions.

Average Variable Costs

The total variable costs (costs that vary with the level of output) divided by the quantity of output produced.

Average Costs

The total cost of production divided by the number of goods produced, representing the per-unit cost of production.