A Lender Requires a 1

question 10

Multiple Choice

A lender requires a 1.20 debt coverage ratio as a minimum.If the net operating income of a property is $45,000,what annual amount of debt service would provide the required debt coverage ratio?

• A)$37,500 or higher
• B)$37,500 or lower
• C)$54,000 or higher
• D)$54,000 or lower

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Definitions:

M&M Proposition I

A theorem stating that in a perfect market, the market value of a company is unaffected by how that company is financed, regardless of whether through debt or equity.

Debt

An amount of money borrowed by one party from another, to be repaid with interest.

M&M Proposition II

A theory in corporate finance that asserts the cost of equity is a linear function of the company's debt/equity ratio, under the assumption of no taxes and financial distress costs.