• Which of the following is NOT a benefit of including covenants in a loan agreement?

1. Covenants restrict borrowers from taking actions that can increase the risk for the lenders.
2. Covenants reduce the cost of borrowing because lenders are more willing to provide a lower interest rate when they can impose restrictions.
3. Covenants protect lenders by reducing their financial loss in the event of default.
4. Covenants provide borrowers with clear expectations of the lenders.

• Select ALL the non-financial covenants from the list.

1. The company must maintain minimum insurance coverage of 2 million.
2. The company must maintain a minimum debt service coverage ratio of 1.5.
3. The company cannot change its business operations.
4. The company must ensure minimum cash balance of 500,000.

• Select the correct formula to calculate the quick ratio.

1. Quick Ratio = Current Assets / Current Liabilities
2. Quick Ratio = (Accounts Receivable + Inventory) / Current Liabilities
3. Quick Ratio = (Cash & Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
4. Quick Ratio = (Cash & Equivalents + Marketable Securities) / Current liabilities

• Select the correct formula to calculate the working capital ratio.

1. Working Capital Ratio = EBIT / Total Debt
2. Working Capital Ratio = Current Assets / Total Debt
3. Working Capital Ratio = EBIT / Current Liabilities
4. Working Capital Ratio = Current Assets / Current Liabilities

• Which of the following scenarios is most likely to indicate high lending risk?

1. Low debt to EBITDA ratio
2. High working capital ratio
3. Low interest coverage ratio
4. Low total liabilities to equity ratio

• What is the best next step when there is a breach of a loan covenant?

1. Investigate why the breach happened
2. Extend time for the borrower to comply with the covenant
3. Review and amend the covenant
4. Declare a loan default

• Calculate debt service coverage ratio (using EBITDA instead of EBIT) based on the company's financial information below:
• Net Operating Profit: 12,000
• Depreciation & Amortization: 2,000
• Accounts Payable: 2,000
• Line of Credit: 2,500
• Current Portion of Long-Term Debt: 3,000
• Interest Expense: 800

1. 2.2
2. 3.7
3. 1.4
4. 1.9

• Calculate funded debt to EBITDA ratio based on the company's financial information below:
• Net Operating Profit: 12,000
• Depreciation & Amortization: 2,000
• Accounts payable: 2,000
• Line of Credit: 2,500
• Current Portion of Long-Term Debt: 3,000
• Non-Current Portion of Long-Term Debt: 15,000

1. 1.1
2. 1.5
3. 1.6
4. 0.5

• If a company takes out a 5-year equally amortizing loan of 20,000, and 6 months later purchases equipment with that loan, what will happen to its financial statements?

1. Capital expenditure will increase by 16,000.
2. Non-current portion of long-term debt will increase by 20,000.
3. PP&E will increase by 4,000.
4. Current portion of long-term debt will increase by 4,000.

• Based on the company's financial forecast, will it be able to meet the covenant requirements after adding a loan in 2020? Select ALL correct statements.

Covenants
Total Liabilities to Equity	<0.9
Debt Service Coverage Ratio	>1.8

1. The company has more current liabilities than non-current liabilities.
2. The company is able to meet the total liabilities to equity requirement at the beginning of the loan term, but there is an increased risk of covenant breach after 2021.
3. The company will not be able to meet the DSCR requirement.
4. The company will be a little over-leveraged when the loan is added, but it should be able to meet the total liabilities to equity requirement for the rest of the loan term.