Series 79 practice questionmediumCapital Structure Analysis
Which covenant metric is most directly designed to protect lenders against a borrower’s declining ability to service debt from cash earnings?
- ABook value per share
- BDividend payout ratio
- CMarket capitalization
- DInterest coverage ratio✓ Correct answer
Explanation
Why D — Interest coverage ratio
Interest coverage ratio Interest coverage compares operating earnings with required interest payments and therefore addresses debt service capacity. Lenders monitor it closely because a shrinking coverage cushion can foreshadow distress and refinancing pressure.
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