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sir am curious to understand why fluffort co. will do the following?
“The bank will be concerned if Flufftort Co tries to replace loan finance with overdraft finance”
The bank loan is subject to a covenant that the ratio of equity to non-current liabilities should be great than 1.3.
If they replace loan finance (a non-current liability) with overdraft finance (a current liability) then the ratio in the covenant will be higher. On paper they might then be OK for the covenant, but it will be like cheating so as to get the ratio higher.
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