Question: 1. Why do debt contracts typically impose covenants based on accounting information, such as working capital, interest coverage, and the debt-equity ratio? Are debt covenants

1. Why do debt contracts typically impose covenants based on accounting information, such as working capital, interest coverage, and the debt-equity ratio? Are debt covenants completely credible as a way to give lenders trust that managers will not take opportunistic actions that reduce their security? Explain.

2. Many compensation plans base short-term incentive awards on both earnings-based performance measures and non-financial measures such as attainment of goals, such as customer satisfaction, tailored to the individual unit. Why? Why might the weight placed on non-financial measures increase relative to the weight on earnings-based measures for lower-level executives?

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1 Use of AccountingBased Covenants in Debt Contracts Why Covenants Use Accounting Information Debt contracts often include covenants based on accounting figures such as Working Capital Current Assets ... View full answer

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