Covenants restrict 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.

Question

Quizplus · Accepted Answer

Covenants restrict the use of leasing and additional borrowings, primarily to protect the debtholders from added risk of dilution of their claims. Leasing and additional borrowings may result in an increase in the company's debt, which would decrease the value of the debtholders' claims. By restricting these actions, covenants aim to protect the debtholders' interests.

Covenants Restrict the Use of Leasing and Additional Borrowings Primarily