Question: Question 5 (10 Marks) (10 Marks) When Lester Ltd approached Hardy Loans Banking Corporation Ltd for an unsecured loan of $100 million, Lester Ltd had

Question 5 (10 Marks)

(10 Marks)

When Lester Ltd approached Hardy Loans Banking Corporation Ltd for an unsecured loan of $100 million, Lester Ltd had a good credit rating. However, the economy was depressed and Hardy Loans Banking Corporation Ltd was concerned about lending such a large sum. (Adapted from Deegan, 1006)

REQUIRED:

You have been asked by Hardy Loans Banking Corporation Ltd to provide a short report to the finance manager, explaining how debt agreements and restrictive covenants can be used to safeguard debt in general. The finance manager wants the brief report to explain which agency costs of debt are controlled by specific covenants. Furthermore, she is interested to know how accounting numbers can be used in the debt covenants to help control any opportunistic behaviour on the part of Lester Ltd.

(10 Marks)

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