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Exhibit 6.5 describes the key financial ratios Standard & Poor’s

Exhibit 6.5 describes the key financial ratios Standard & Poor’s

Exhibit 6.5 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.

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? How can youtell?

Financial Ratios
The term is enough to curl one's hair, conjuring up those complex problems we encountered in high school math that left many of us babbling and frustrated. But when it comes to investing, that need not be the case. In fact, there are ratios that,...

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Firm I 2.7 3.7 19.8 8.2 4.0 9.9 54.8 Firm 2 Firm 3 EBIT interest coverage EBITDA interest coverage FFO/Total debt Free operating cash flow/Total debt Total debt/EBITDA Return Total debt/Capital 16.7 24.6 135.1 87.9 0.3 32.7 18.7 80.2 40.6 29.2 30.2 on capital