Question

A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan. Which THREE of the following actions could be taken by the company?

Accepted Answer

The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.

Accepted Answer

The project could be foregone if it cannot be funded without breaching the covenant

Accepted Answer

The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.

Answer

The project could proceed if the cash inflows from the project will enable some of the debt to be repaid before the end of the financial year and so the breach of covenant may never be detected

Answer

The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant

Answer

The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.

A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the…

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