Debt Financing

Question 1

Name two common types of covenants that accompany debt contracts. Explain via examples.

Answer 1

• limits on other balance sheet ratios (e.g. a minimum amount of working capital)
• minimum profitability requirements (e.g. interest coverage ratio)

Question 2

• Recalculate the PV values assuming LIBOR rises to 4% but spreads are unchanged.
• How does the situation change? Is firm Z still better off with SCF than without? Is the combined effect of SCF and longer payment terms still positive?

Answer 2

The combined effect is worse off (997:994).

SCF Improves, but only is better when interest rates are low.

Question 3

Answer 3

The combined effect is