Question

Which of the following actions helps a firm to maintain compliance with a debt covenant that includes a minimum current ratio and a minimum retained earnings balance: (1) refinancing current debt on a long‐term basis, (2) appropriating retained earnings, (3) purchasing treasury stock, (4) declaring cash dividends.

Answer 1

Answer:

1 and 2

Explanation:

Refinancing current debt on a long-term basis is actually transfers any current liability to long term liability. Which decreases the total current liability balance and ultimately it improves the current ratio.

Appropriating retained earning is the accumulation of earning rather than distributing it. It will improve the minimum retained earning level.