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Subject F3: Financial Strategy

23 Shelf Co’s profit before interest and tax is forecast to be $4.25 million this year,
and its tax rate is 20%.

The company has a $10 million bank borrowing, on which it pays interest at a
fixed rate of 8%. The bank has written an interest cover covenant into the
borrowing of 5 times.

What is Shelf Co’s interest cover expected to be, and what is the status of
the covenant?

A Interest cover 5.31 – covenant breached

B Interest cover 5.31 – covenant not breached

C Interest cover 3.45 – covenant breached

D Interest cover 3.45 – covenant not breached

24 Osborne Co has borrowed money from its bank to fund two recent substantial
investment projects.

The bank has inserted two covenants into the debt agreement:

 The annual operating profit margin must be at least 12%

 The maximum dividend payable is $1 million.

What kind of covenants are these?

A Profit margin covenant: Positive, Dividend covenant: Positive

B Profit margin covenant: Positive, Dividend covenant: Negative

C Profit margin covenant: Negative, Dividend covenant: Negative

D Profit margin covenant: Negative, Dividend covenant: Positive

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