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      Question

      In a Term Loan appraisal, the 'DSCR' is a critical

      ratio. What does a DSCR of less than 1 indicate?
      A The project is highly profitable Correct Answer Incorrect Answer
      B The project has insufficient cash flow to cover its debt obligations Correct Answer Incorrect Answer
      C The project's assets are more than its liabilities Correct Answer Incorrect Answer
      D The borrower has a high credit rating Correct Answer Incorrect Answer
      E The project is in the initial stage Correct Answer Incorrect Answer

      Solution

      Debt Service Coverage Ratio (DSCR) = Net Operating Income / Total Debt Service. A DSCR below 1 means the project's operating cash flows are insufficient to cover the annual principal and interest payments, signaling higher credit risk.

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