Question

Assume you are a fixed-income analyst at an investment management firm. You are following the developments at two companies, Sturdy Machines and Patriot Manufacturing, which are both U.S.-based industrial companies that sell their products worldwide. Both companies operate in cyclical industries. Sturdy Machines’ profits have suffered from a rising dollar and a slump in its business. The company has said that major cuts in its operating expenses are likely to be necessary if it is to make a profit next year. On the other hand, Patriot Manufacturing has been able to maintain its profitability and enhance its balance sheet. Selected data for both companies follow:


You are monitoring the bonds of these companies for possible purchase. You notice that a rating agency recently downgraded the senior debt of Sturdy Machines from AA to A and upgraded the senior debt of Patriot Manufacturing from AA to AAA. You received the following yield quotes from a broker:
Sturdy Machines 7.50% due June 1, 2008, quoted at 7.10%.
Patriot Manufacturing 7.50% due June 1, 2008, quoted at 7.10%.

Required:
Recommend which of the above bonds you should buy. Justify your choice with reference to at least two ratios and two qualitative factors from the information provided.
(CFAadapted)


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  • CreatedJanuary 22, 2015
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