FIN/402 - Case Problem 10.2 The Case of the Missing Bond Ratings
Case Problem 10.2 The Case of the Missing Bond Ratings
LG 2
It’s probably safe to say that there’s nothing more important in determining a bond’s rating than the underlying financial condition and operating results of the company issuing the bond. Just as financial ratios can be used in the analysis of common stocks, they can also be used in the analysis of bonds—a process we refer to as credit analysis. In credit analysis, attention is directed toward the basic liquidity and profitability of the firm, the extent to which the firm employs debt, and the ability of the firm to service its debt.
| 1. Current ratio | 1.13 | 1.39 | 1.78 | 1.32 | 1.03 | 1.41 |
| 2. Quick ratio | 0.48 | 0.84 | 0.93 | 0.33 | 0.50 | 0.75 |
| 3. Net profit margin | 4.6% | 12.9% | 14.5% | 2.8% | 5.9% | 10.0% |
| 4. Return on total capital | 15.0% | 25.9% | 29.4% | 11.5% | 16.8% | 28.4% |
| 5. Long-term debt to total capital | 63.3% | 52.7% | 23.9% | 97.0% | 88.6% | 42.1% |
| 6. Owners’ equity ratio | 18.6% | 18.9% | 44.1% | 1.5% | 5.1% | 21.2% |
| 7. Pretax interest coverage | 2.3 | 4.5 | 8.9 | 1.7 | 2.4 | 6.4 |
| 8. Cash flow to total debt | 34.7% | 48.8% | 71.2% | 20.4% | 30.2% | 42.7% |
Notes:
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Rating:
/5
Solution: FIN/402 - Case Problem 10.2 The Case of the Missing Bond Ratings