Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?

A company has in a 5% corporate bond in issue on which there are two loan covenants.

• Interest cover must not fall below 3 times

• Retained earnings for the year must not fall below $3.5 million The Company has 200 million shares in issue.

The most recent dividend per share was $0.04.

The Company intends increasing dividends by 10% next year.

Financial projections for next year are as follows:

Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
A . The company will be in compliance with both covenants.
B . The company will be in breach of both covenants.
C . The company will breach the covenant in respect of retained earnings only.
D . The company will be in breach of the covenant in respect of interest cover only.

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Answer: C