Question: Determining target leverage. A firm has an operating profit margin of 4% in a realistic worst case, and it i considered a moderately vulnerable business,

Determining target leverage. A firm has an operating profit margin of

Determining target leverage. A firm has an operating profit margin of 4% in a realistic worst case, and it i considered a moderately vulnerable business, so that it would be prudent to keep an interest coverage ratio o 3 in the realistic worst case. You have the following information from its most recent accounts: Answer the questions that follow, assuming that rating criteria and current bond market conditions are described by: a. Determine a target level of debt for the firm, both in $ and as a ratio to capital. What rating is the target debt likely to obtain? [Hint: work out three different scenarios, one for each of the credit ratings given in the table, and then pick the answer that is internally consistent.]

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