MGAC02H3 Chapter Notes -Effective Interest Rate, Loan Covenant, Credit Risk
Document Summary
Dry cleaning-to-go limited (dc) is a private company that has elected to comply with ifrs. The company is reasonably small, with million in sales, and 40 retail locations. Dc has just negotiated a new equipment loan, with covenants that specify a maximum 2-to-1 debt-to-equity ratio. Other covenants require a minimum level of ,000 in cash, and restrict dividends to. These latter covenants require compliance, but are not affected by accounting policies. The debt-to-equity ratio restriction means that the company would prefer to maximize equity (earnings) and minimize debt. The effective interest rate for the ,000,000 loan is determined by looking at the annual carrying cost (,000 per year) and also the ,000 upfront fee. When both are factored in, the effective interest rate is 7. 2%: ,000,000 = ,000 + ,000 (p/a, x %, 10) + ,000,000 (p/f, x %, 10) x = 7. 2%
