Covenants restricting the use of leasing and additional borrowings primarily protect:
A)the equityholders from added risk of default.
B)the debtholders from added risk of dilution of their claims.
C)the debtholders from the transfer of assets.
D)the management from having to pay agency costs.
E)None of the above.

Question

Quizplus · Accepted Answer

Covenants restricting the use of leasing and additional borrowings primarily protect debtholders from added risk of dilution of their claims. Leasing and additional borrowings can increase the company's overall debt obligations, which can decrease the value of debtholders' claims. By restricting these actions, debtholders are protected from a potential decrease in their payouts if the company becomes unable to fulfill all of its debt obligations.

Covenants Restricting the Use of Leasing and Additional Borrowings Primarily