David Wright, CFA, an analyst with Blue River Investments, is considering buying a .DOCX

David Wright, CFA, an analyst with Blue River Investments, is considering buying a

David Wright, CFA, an analyst with Blue River Investments, is considering buying a Mon- trose Cable Company corporate bond. He has collected the following balance sheet and in- come statement information for Montrose as shown in Exhibit 10.10. He has also calculated the three ratios shown in Exhibit 10.11, which indicate that the bond is currently rated “A” according to the firm’s internal bond-rating criteria shown in Exhibit 10.13. Wright has decided to consider some off-balance-sheet items in his credit analysis, as shown in Exhibit 10.12. Specifically, Wright wishes to evaluate the impact of each of the off-balance-sheet items on each of the ratios found in Exhibit 10.11.

a.       Calculate the combined effect of the three off-balance-sheet items in Exhibit 10.12 on

each of the following three financial ratios shown in Exhibit 10.11.

                                                         i.            EBITDA/interest expense

                                                        ii.            Long-term debt/equity

                                                      iii.            Current assets/current liabilities

The bond is currently trading at a credit premium of 55 basis points. Using the internal bond-rating criteria in Exhibit 10.13, Wright wants to evaluate whether or not the credit yield premium incorporates the effect of the off-balance-sheet items.

 

 
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