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GG's gearing is currently 50% compared to the industry average of 40% (both measured as debt/equity). GG's debt is all in the form of a single bank loan that is repayable in five years' time. The directors of GG are seeking to raise finance for a new project and they are considering an additional bank loan from the same bank.
Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?
Suggested Answer: B
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28 comments · newest first
AU
Audria
10 months ago
A covenant on dividends could really limit their options.
SH
Shonda
10 months ago
I think a lack of profits would definitely be a problem.
LA
Lauran
10 months ago
Definitely a red flag for the bank!
LU
Luis
11 months ago
Wait, how can they take on more debt with that gearing?
LE
Leanna
11 months ago
GG's gearing is higher than the industry average.
LE
Leonora
11 months ago
The lack of profits for tax relief on the new loan's interest sounds like a valid reason for the bank to hesitate. I think that could be a big issue.
CH
Charisse
12 months ago
I'm not entirely sure, but I feel like a property revaluation increasing in value wouldn't necessarily stop the bank from lending. It seems more positive than negative.
LI
Linwood
12 months ago
I think the interest cover ratio is crucial here. If it's projected to decrease, it might breach existing covenants, which could prevent the new loan.
LI
Lina
12 months ago
I remember studying covenants and how they can limit a company's financial flexibility. A restriction on dividends could definitely be a concern.
LI
Lilli
1 year ago
I've got a good feeling about this one. The question is really testing our understanding of loan covenants and how they can restrict further borrowing. I think option B is the most likely answer here.
BI
Billi
1 year ago
Okay, let's think this through step-by-step. The question is asking what would prevent the bank from lending more, so I need to look at the existing loan conditions and see if any of those would be an issue.
DA
Daryl
1 year ago
Hmm, I'm a bit unsure about this one. I'll need to carefully read through the details about GG's current financing and the potential new loan to figure out which option is most likely to prevent the new loan.
RI
Rikki
1 year ago
This question seems straightforward - I think the key is to focus on the covenants and restrictions on the existing bank loan that could prevent the bank from lending more.
BR
Brittni
1 year ago
I'm just hoping GG doesn't end up in a real GGgly mess with all this debt. The bank better be careful, or they might find themselves in a real bind!
SH
Shawnda
1 year ago
Haha, the bank must be feeling pretty geared up to lend GG more money. But they'd better not be too leveraged, or they might find themselves in a sticky situation!
LA
Lanie
1 year ago
C is the answer. The revaluation of the property would give GG more collateral, so the bank should be willing to lend them more.
FL
Flo
1 year ago
D seems like the correct answer to me. If GG doesn't have enough profits to claim tax relief on the new loan, the bank won't lend them the money.
TA
Tammi
10 months ago
Good point! Both D and B could be deal-breakers for the bank.
OR
Oretha
10 months ago
True, without profits, the bank might hesitate.
OD
Odelia
10 months ago
I agree, D makes the most sense. No profits, no tax relief.
FE
Fernanda
11 months ago
But what about B? A decrease in interest cover could be a big issue too.
ER
Ernie
1 year ago
I see your point, Ivette. It's important to consider all potential risks before taking on additional debt.
IV
Ivette
1 year ago
But what about option B? A decrease in interest cover could also be a concern for the bank.
RA
Rashida
1 year ago
I agree with Glen, a covenant on the existing loan could restrict the level of dividend.
IS
Isaac
1 year ago
I think the answer is B. A decrease in interest cover would definitely breach the existing loan covenant, preventing the bank from lending more money.
MI
Mignon
1 year ago
That's true, it would be a red flag for the bank when considering a new loan.
RO
Ronnie
1 year ago
I agree, a decrease in interest cover would definitely breach the existing loan covenant.
GL
Glen
1 year ago
I think option A would prevent the bank from lending the finance.