Question
Anne is a senior analyst in PPG at EAC. She has been given a list of potential investments that have been brought to the firm
Anne is a senior analyst in PPG at EAC. She has been given a list of potential investments
that have been brought to the firm by Morgan Stanley. Anne has been charged with the task of selecting no more than three of the projects for PPG to pursue.
- InBev is looking for $1.5 billion to build three new breweries in Mexico, England,
and South Africa. It expects to pay 3.5% annual interest. It wants the money for 15
years.
- Kroger is looking for $400 million to update and expand their stores. This firm
expects to pay 4.6% annual interest. It wants the money for 15 years.
- 3M is going to build a rocket fuel plant in Florida. It wants $600 million and expects
to pay 3.25% in interest. They are looking for a 20-year maturity.
- Intel is looking for $1 billion to build 5 microchip plants (South Korea, Thailand,
Ireland, India, and West Virginia). It expects to pay 3.2% annual interest and is
looking for a 25-year maturity.
- American Railcar is looking for $475 million to purchase a fleet of coal cars
(President Trump has pledged to bring coal mining back to prominence). This
company is willing to pay 8% annual interest and wants a 30-year maturity.
- Weyerhaeuser is looking for $400 million to build three plants to manufacture
artificial deck flooring. It expects to pay 7.75% and wants a 15-year maturity.
- McDonalds is looking for $1 billion to renovate many of its outlets. It expects to pay
4.5% interest and wants a 20-year maturity.
- Rite Aid is looking for $800 million to both expand existing stores and to purchase
small independent drug stores. This firm expects to pay 6.5% and needs the money
for 20 years.
- Macy's is looking for $350 million to establish a major presence in online shopping.
Macy's expects to pay 4.25% and wants the money for 10 years.
Interest rates are near an all-time low and finding companies with a high credit rating that
need substantial funds and are willing to pay an interest rate significantly above 3% are few
and far between.
In addition, you are to provide the dollar limit that you would recommend investing in each recommended project. There is currently $500 million available to be invested and PPG does not like to take on a project for less than $50 million.
PPG also prefers not to invest more than $200 million in any one project but may be willing
to invest more than $200 million in any one company.
It would be preferable if your recommended investments were not from the same industry
sector. Anne expects you to defend your recommendation and explain why you did not
recommend those projects not recommended. The current risk-free rate is 2.5%. PPG loan
portfolio of $20 billion is currently rated A3 (7 on the scale below). If your selections turn
into actual loan commitments, you are to be confident that the portfolio average rating does not fall below Moody's Baa3. The PPG shies away from investing in firms that have a debt/equity ratio greater 1.5.
Use the table immediately below to indicate what would happen to the average portfolio
rating if PPG funds the projects that you have recommended at the dollar amounts that you
have suggested.
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