Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does repayment capacity refer to?

1. The ability to generate revenue

2. The ability to cover term debt and capital lease payments

3. The maximum amount of money borrowed

4. The value of assets held by the business

The correct answer is: The ability to cover term debt and capital lease payments

Repayment capacity specifically refers to a business’s ability to meet its financial obligations, particularly in terms of covering both term debt and capital lease payments. This concept is crucial for lenders and investors, as it assesses the firm's financial health by evaluating its cash flow and income generation relative to its debt responsibilities. A solid repayment capacity indicates that the business is well-positioned to manage its liabilities, which in turn can lead to improved creditworthiness and access to financing. The options presented relate to the broader financial aspects of a business but focus on different elements. Generating revenue is essential, but without analyzing how that revenue translates into cash flow for debt servicing, one cannot accurately gauge repayment capacity. The maximum amount of money borrowed speaks to a company’s borrowing limit rather than its ability to service debt, which is what repayment capacity involves. Lastly, while the value of assets held by the business is important for assessing overall equity and security for loans, it does not directly determine how well the business can meet its ongoing financial commitments.