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Hi John,
Answer provided:
“Interest cover improved in 20Y6 and will improve further if High K makes use of revolving credit facilities (like a credit card with bank).”
my question 1:
(I understood from your reply in another topic what revolving credit facilities is)
But I don’t understand why will interest cover improve further.. there is no indication that future borrowing will decrease right?
and what does it have to do with whether or not a revolving credit facilities, vs if it was other types of debts?Answer provided:
“However, when High L Co’s loan come up for renewal, term available may not be as favourable as those High K Co has currently.”
my question 2:
Is this because questions said the new government of Townia has tightened the fiscal policy?Thank you!
Interest cover has certainly improved a lot in the past. They intend to fund the new investments by closing all its town centre and convenience stores. That suggests that they will not be raising more long-term debt but instead will use revolving credit (e.g. overdraft) for any short-term needs.
The fact that the terms for renewal of the current loan may not be as favourable is because of the tightening of the fiscal policy.
“they intend to fund the new investment by closing all its town centre and convenience store”
but in the question,these are actually plan of its competitor Dely Co, instead of High K.My understanding of this Exam Answer :“Interest cover improved in 20Y6 and will improve further if High K makes use of revolving credit facilities” is now:
Regardless the amount of debt needed (increase of reduce), making (right) use of revolving credit facilities, exclusively or together with other forms of debt, will improve interest cover, because of lower interest expenses from the flexibility of drawing amount.
Could you advise if this understanding is correct? Thank you!
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