Intro to Finance: How Much Can They Borrow?

Ravi wants a loan, and his lenders have written covenants into the agreement: a current ratio floor, a times interest earned floor, and a debt ratio ceiling. Borrowing changes the very ratios being tested, so the maximum can't be guessed; it has to be solved for. A four-step method turns each covenant into an inequality in the loan amount, solves it, and takes the binding constraint, the lowest limit. Part of the Intro to Finance series with Professor Harrison Ham. (c) Harrison Ham, Department of Finance, Clemson University