describes the key financial ratios Standard & Poor's analysts use to assess credit risk and assign...

 

 

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describes the key financial ratios Standard & Poor's analysts use to assess credit risk and assign credit ratings to industrial companies. The same financial ratios for three firms follow. Firm 1 Firm 2 Firm 3 EBIT interest coverage EBITDA interest coverage FFO/Total debt (%) Free operating cash flow/Total debt (%) Total debt/EBITDA Return on capital (%) Total debt/Capital (%) 2.7 12.8 16.7 3.7 18.7 24.6 19.8 80.2 135.1 8.2 40.6 87.9 4.0 1.0 0.3 9.9 29.2 32.7 54.8 30.2 8.1 Required: 1. What credit rating would be assigned to Firm 1? 2 What credit rating would be assigned to Firm 2? 3. Does Firm 3 have more or less credit risk than Firm 2? 1. Credit rating for Firm 1 2. Credit rating for Firm 2 3. Does Firm 3 have more or less credit risk than Firm 2? Exhibit 6.5 Standard & Poor's Key Financial Ratios and Ratings of Corporate Debt Three-Year Medians AAA AA A BBB BB EBIT interest coverage 23.8 13.6 6.9 4.2 2.3 0.9 0.4 EBITDA interest coverage 25.3 17.1 9.4 5.9 3.1 1.6 0.9 FFO/Total debt (%) 167.8 77.5 43.2 34.6 20.0 10.1 2.9 Free operating cash flow/Total debt (%) 104.1 41.1 25.4 16.9 7.9 2.6 (0.9) Total debt/EBITDA 0.2 1.1 1.7 2.4 3.8 5.6 7.4 Return on capital (%) 35.1 26.9 16.S 13.4 10.3 6.7 2.3 Total debt/Capital (%) 6.2 34.8 39.8 45.6 57.2 74.2 101.2 Formulas EBIT interest coverage Earnings from continuing operations* before interest and taxes/Gross interest incurred before subtracting capitalized interest and interest income EBITDA interest coverage Adjusted earnings from continuing operations before interest, taxes. depreciation, and amortization/Gross interest incurred before subtracting capitalized interest and interest income Funds from operations (FFO)/Total Net income from continuing operations, depreciation, and amortization, debt deferred income taxes, and other noncash items/Long-term debts + Current maturities + Commercial paper and other short-term borrowings Free operating cash flow/Total debt FFO - Capital expenditures +(-) increase (decrease) in working capital (excluding changes in cash, marketable securities, and short-term debt)/Long- term debts + Current maturities, commercial paper, and other short-term borrowings Total debt/EBITDA Long-term debt + Current maturities, commercial paper, and other short-term borrowings/Adjusted earnings from continuing operations before interest, taxes, and depreciation and amortization Return on capital EBIT/Average of beginning-of-year and end-of-year capital, including short- term debt, current maturities, long-term debt, noncurrent deferred taxes, minority interest, and equity (common and preferred stock) Total debt/Capital Long-term debt + Current maturities, commercial paper, and other short-term borrowings/ Long-term debt + Current maturities, commercial paper, and other short-term borrowings + Shareholder's equity (including preferred stock) + Nonparticipating interests Note: Standard & Poor's uses different ratios to rate debt iccued by utilities and financial services companies. The univerce of rated companies includes about 1.000 inductrial firme. See Corporate Rating: Criteria 2005 (New York: Standard & Poor's Corp.). pp. 4344. *Including interect income and equity carninge: excluding nonrecurring items. Excludes intereat income, equity carnings, and nonrecurring itemc; also excludes rental expence that exceeds the interest component of capitalized operating leases. Includes amounts for operating lease debt equivalent, and debt associated with accounts receivable sales/securitization programs. describes the key financial ratios Standard & Poor's analysts use to assess credit risk and assign credit ratings to industrial companies. The same financial ratios for three firms follow. Firm 1 Firm 2 Firm 3 EBIT interest coverage EBITDA interest coverage FFO/Total debt (%) Free operating cash flow/Total debt (%) Total debt/EBITDA Return on capital (%) Total debt/Capital (%) 2.7 12.8 16.7 3.7 18.7 24.6 19.8 80.2 135.1 8.2 40.6 87.9 4.0 1.0 0.3 9.9 29.2 32.7 54.8 30.2 8.1 Required: 1. What credit rating would be assigned to Firm 1? 2 What credit rating would be assigned to Firm 2? 3. Does Firm 3 have more or less credit risk than Firm 2? 1. Credit rating for Firm 1 2. Credit rating for Firm 2 3. Does Firm 3 have more or less credit risk than Firm 2? Exhibit 6.5 Standard & Poor's Key Financial Ratios and Ratings of Corporate Debt Three-Year Medians AAA AA A BBB BB EBIT interest coverage 23.8 13.6 6.9 4.2 2.3 0.9 0.4 EBITDA interest coverage 25.3 17.1 9.4 5.9 3.1 1.6 0.9 FFO/Total debt (%) 167.8 77.5 43.2 34.6 20.0 10.1 2.9 Free operating cash flow/Total debt (%) 104.1 41.1 25.4 16.9 7.9 2.6 (0.9) Total debt/EBITDA 0.2 1.1 1.7 2.4 3.8 5.6 7.4 Return on capital (%) 35.1 26.9 16.S 13.4 10.3 6.7 2.3 Total debt/Capital (%) 6.2 34.8 39.8 45.6 57.2 74.2 101.2 Formulas EBIT interest coverage Earnings from continuing operations* before interest and taxes/Gross interest incurred before subtracting capitalized interest and interest income EBITDA interest coverage Adjusted earnings from continuing operations before interest, taxes. depreciation, and amortization/Gross interest incurred before subtracting capitalized interest and interest income Funds from operations (FFO)/Total Net income from continuing operations, depreciation, and amortization, debt deferred income taxes, and other noncash items/Long-term debts + Current maturities + Commercial paper and other short-term borrowings Free operating cash flow/Total debt FFO - Capital expenditures +(-) increase (decrease) in working capital (excluding changes in cash, marketable securities, and short-term debt)/Long- term debts + Current maturities, commercial paper, and other short-term borrowings Total debt/EBITDA Long-term debt + Current maturities, commercial paper, and other short-term borrowings/Adjusted earnings from continuing operations before interest, taxes, and depreciation and amortization Return on capital EBIT/Average of beginning-of-year and end-of-year capital, including short- term debt, current maturities, long-term debt, noncurrent deferred taxes, minority interest, and equity (common and preferred stock) Total debt/Capital Long-term debt + Current maturities, commercial paper, and other short-term borrowings/ Long-term debt + Current maturities, commercial paper, and other short-term borrowings + Shareholder's equity (including preferred stock) + Nonparticipating interests Note: Standard & Poor's uses different ratios to rate debt iccued by utilities and financial services companies. The univerce of rated companies includes about 1.000 inductrial firme. See Corporate Rating: Criteria 2005 (New York: Standard & Poor's Corp.). pp. 4344. *Including interect income and equity carninge: excluding nonrecurring items. Excludes intereat income, equity carnings, and nonrecurring itemc; also excludes rental expence that exceeds the interest component of capitalized operating leases. Includes amounts for operating lease debt equivalent, and debt associated with accounts receivable sales/securitization programs.

Answer rating: 100% (QA)

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