Foot Locker, Inc., reported an $18 million loss on sales of $1,283 million for the quarter ended August 4, 2007. The quarterly financial filing (10-Q) also contained this warning for investors and creditors.

Required:
1. What is a minimum fixed charge coverage ratio, and what purpose does it serve in the company€™s loan agreements?
2. Why would Foot Locker agree to restrict dividends to just 50% of its prior year€™s net income?
3. In general terms, explain how a company such as Foot Locker alters its accounting choices to avoid violating debt covenants tied to financial statement numbers.
4. What is likely to happen if Foot Locker does not satisfy one or more of the loan covenants atyear-end?

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Under the Company's revolving credit and term loan agree ond half of the year, the Company may not continue to ment, the Company is required to satisfy certain financial and be in compliance with the fixed charge coverage ratio. In ad- operating covenants, including a minimum fixed charge cov dition, the restricted payment provision may prohibit the erage ratio. In addition, this agreement restricts the amount Company from the payment of the dividend at the current rate the Company may expend in any year for dividends to 50 per 2008. cent of its prior year's net income. Based upon the Company's second quarter financial results and business uncertainties for Source: Foot Locker Inc. Form 10-Q for the quarter ended August 4, 2007