Completely lost on this one (attached). Any assistance would be appreciated.
Chapter 10: Problem 5(a-b) 5. David Wright, CFA, an analyst with Blue River Investments, is considering buying a Montrose Cable Company corporate bond. He has collected the following balance sheet and income 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 offbalance-sheet items. b. State and justify whether or not the current credit yield premium compensates Wright for the credit risk of the bond based on the internal bond-rating criteria found in Exhibit 10.13. Chapter 10: Problem 5(a-b) Exhibit 10.10 Montrose Cable Company Year Ended March 31, 201 (US$ Thousands) Balance Sheet Current Assets $ 4,735 Fixed Assets $ 46,225 Total assets $ 50,960 Current Liabilities $ 4,500 Long-term debt $ 10,000 Total Liabilities $ 14,500 Shareholders' Equity $ 33,460 Total Liabilities and Shareholders' Equity $ 47,960 Income Statement Revenue Operating and Administrative Expenses Operating income Depreciation and Amortization Interest Expense Income before interest and taxes Taxes Net Income $ 18,500 $ 14,050 $ 4,450 $ (1,675) $ (942) $ 1,833 $ (641) $ 1,192 Exhibit 10.11 Selected Ratios and Credit Yield Premium Data for Montrose EBITDA/Interest Expense Long-term debt/equity Current assets/current liabilities Credit yield premium over U.S. Treasuries Exhibit 10.12 Montrose Off-Balance-Sheet Items Montrose has guaranteed the long-term debt (principal only) of an unconsolidated affilate. This obligation has a present value of $995.00. Montrose has sold $500,000 of accounts receivable with recourse at a yield of 8 percent. Montrose is a lessee in a new noncancelable operating leasing agreement to finance transmission equipment. The discounted present value of the lease pauyments is $6,144,000 using an interest rate of 10 percent. The annual pauyment will be $1,000,000. Exhibit 10.13 Blue River Investment: Internal Bond-Rating Criteria and Credit Yield Premium Data 4.72 0.30 1.05 55 basis points
