Which of the following is an example of a negative covenant? A. The borrower wil

Question

Which of the following is an example of a negative covenant?

A. The borrower will at all times maintain a ratio of current assets to current liabilities that is greater than 2.0 to 1.0.

B. The borrower will use the proceeds of the loan in accordance with the loan purposes set forth in the loan agreement.

C. The borrower shall prepare financial statements in accordance with GAAP.

D. The borrower agrees that it will not repurchase its stock using the proceeds of this loan, either directly or indirectly.

Explanation / Answer

A NEGATIVE COVENANT IS A PROMISE MADE BY THE BORROWER, NOT TO EXCEED CERTAIN FINANCIAL RATIOS OR NOT TO CONDUCT CERTAIN ACTIVITIES. IN THE VIEW OF THE ABOVE WE CAN SEE

A) THE BORROWER WILL AT ALL TIMES MAINTAIN A RATIO OF CURRENT ASSETS TO CURRENT LIABILITIES THAT IS GREATER THAN 2.0 TO 1.0

AND

D) THE BORROWER AGREES THAT IT WILL NPT REPURCHASE ITS STOCK USING THE PROCEEDS OF THIS LOAN EITHER DIRECTLY OR INDIRECTLY.

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