Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?

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?
A . A covenant on the existing bank loan that restricts the level of dividend that can be paid.
B . A projected decrease in interest cover that would breach a covenant on the existing loan.
C . The revaluation of GG’s property that shows an increase in its value since the existing bank loan was taken out.
D . A projected lack of profits to be able to claim tax relief on the additional interest arising from the new loan.

Answer: B