Reference no: EM133175409

Question - On 1 July 20X1, Tudor Ltd borrowed $10 million from OzBank to expand their operations in each major city in Australia. The requirements of the loan are that it is to be repaid on 30 June 20X7. OzBank specifed a debt covenant in the loan agreement, requiring the ratio of total liabilities to total tangible assets not exceed 70%. at 30 June 20X2 the ratio of total liabilities to total tangible assets was 69%. As part of the expansion, Tudor Ltd invested in plant and equipment. Due to a decline in demand for services as a result of the global pandemic, analysts are predicting that the company may need to write-down some of its plant and equipment during the year ended 30 June 20X3.

Required - Apply your knowledge and understanding of Agency Theory to briefly explain each of the following using your own words:

1. Why a manager would accept a loan arrangement that contains a debt covenant?

2. Whether and/or how writing down plant and equipment may impact on the debt covenant?

3. What actions a manager is likely to take if there are concerns that a debt covenant may be breached?