Determining Credit Rating
The chart below shows financial ratios for three companies. Use the data, along with Exhibit 7.6 to determine a bond rating for each of the three companies below.
| EBITA/ Avg. Assets | Operating Margin | EBITA Margin | EBITA/
Interest Expense |
(FFO + Int Exp)/Int Exp | Debt/ EBITDA | Debt/ Book Cap. | FFO/Debt | Retained Cash Flow/ Net Debt | CAPEX/ Depreciation | Revenue Volatility | ||
| Company | 1 | 12.80% | 16.30% | 18.82% | 15.0 | 13.4 | 1.6 | 38.12% | 44.72% | 37.64% | 1.3 | 10.1 |
| Company | 2 | 9.20% | 11.40% | 13.00% | 2.8 | 5.1 | 3.3 | 48.60% | 21.73% | 21.92% | 1.2 | 16.0 |
| Company | 3 | 13.87% | 18.62% | 20.76% | 22.2 | 20.5 | 1.3 | 39.87% | 60.82% | 32.79% | 1.3 | 6.3 |
| Company | Rating |
| Company 1 | Answer A
|
| Company 2 | Answer Ba
|
| Company 3 | Answer Aa
|
Feedback
Company 1 has ratios that are similar to those for companies with a rating of “A.”
Company 2 has ratios that are similar to those for companies with a rating of “Ba.”
Company 3 has ratios that are similar to those for companies with a rating of “Aa.”