Recent historical financial information for XYZ is presented below. Items are in $ millions unless otherwise stated.

Year	2016	2017	2018
Income statement
Revenue	1,707	1,828	1,796
COGS	938	1,099	1,179
Gross Profit	769	729	616
S&A Expense	338	261	150
Earnings before interest, tax, depreciation and amortisation (EBITDA)	431	468	466
Earnings before interest and tax (EBIT)	345	385	419
Net profit after tax (NPAT)	173	201	225
Earnings per share (cents)	36	42	54
Dividends per share (cents)	29	32	34
Balance sheet
Shareholders equity	820	1,021	1,246
Assets	1,800	2,001	2,226
Debt	980	980	980

The yield on 10-year Government bonds is 3.0%. You estimate the market risk premium at 5.0% and the equity beta of XYZ at 2. The corporate tax rate is 30%.

You are considering an investment in XYZ, which currently trades at $3.55 per share. It has 420 million shares on issue.

You anticipate that XYZs reinvested earnings from 2018 will earn returns of 12% above its cost of equity capital in 2019, which is your first forecast year. That is, assume that today is 31 December 2018. Also assume that XYZ pays annual dividends.

You expect XYZ returns on reinvested earnings will decline by 4% each year until abnormal returns are eroded. You also expect that XYZ dividend payout ratio will increase by 5% p.a. until it pays out 88%. You then expect this payout ratio to be maintained into perpetuity.

XYZs outstanding debt has ten years to maturity. They are semi-annual pay bonds. (Assume that there are no additional items in the accounts and the effective tax rate of the firm is the marginal tax rate)

You have obtained the following data from Standard and Poors which shows the typical financial ratios associated with credit ratings of different levels. The table also shows the credit spread associated with these ratings in the current market. The spread is the additional return required over 10 year government bond rate, associated with these credit ratings.

Ratio	AAA	AA	A	BBB	BB	B	CCC
EBIT interest coverage	24	14	7	4	2	1	0.4
EBITDA interest coverage	25	17	9	6	3	2	1
Debt/EBITDA	0.2	1.1	1.7	2.4	3.8	5.6	7.4
Pre-tax return on assets (%)	35	27	17	13	10	7	2
Debt/book value of debt & equity (%)	6	35	40	46	57	74	101
Current credit spreads (%)	0.2	0.8	1.2	1.5	2.5	3.5	5.0

What is an appropriate credit rating of the firm?

Recent historical financial information for XYZ is presented below. Items are in 5 millions unless otherwise stated. Year 2016 2017 2018 Income statement Revenue 1,707 1,828 1,796 COGS 938 1,099 1.179 Gross Profit 769 729 616 S&A Expense 338 261 150 Earnings before interest, tax, depreciation and amortisation 431 468 466 (EBITDA) Earnings before interest and tax 345 385 (EBIT) 419 Net profit after tax (NPAT) 173 201 225 Earnings per share (cents) 36 42 54 Dividends per share (cents) 29 32 34 Balance sheet Shareholders' equity 820 1,021 1,246 Assets 1.800 2,001 2,226 Debt 980 980 980 The yield on 10-year Government bonds is 3.0%. You estimate the market risk premium at 5.0% and the equity beta of XYZ at 2. The corporate tax rate is 30%. You are considering an investment in XYZ, which currently trades at $3.55 per share. It has 420 million shares on issue. You anticipate that XYZ's reinvested earnings from 2018 will earn returns of 12% above its cost of equity capital in 2019, which is your first forecast year. That is, assume that today is 31 December 2018. Also assume that XYZ pays annual dividends. You expect XYZ returns on reinvested earnings will decline by 4% each year until abnormal returns are eroded. You also expect that XYZ dividend payout ratio will increase by 5% p.a. until it pays out 88%. You then expect this payout ratio to be maintained into perpetuity. XYZ's outstanding debt has ten years to maturity. They are semi-annual pay bonds. (Assume that there are no additional items in the accounts and the effective tax rate of the firm is the marginal tax rate) You have obtained the following data from Standard and Poors which shows the typical financial ratios associated with credit ratings of different levels. The table also shows the credit spread associated with these ratings in the current market. The spread is the additional return required over 10 year government bond rate, associated with these credit ratings. Ratio AAA AA A BBB BB B EBIT interest coverage 24 14 7 2 1 EBITDA Interest coverage 25 17 9 6 3 2 1 Debt EBITDA 0.2 1.1 1.7 2.4 3.8 5.6 7.4 Pre-tax return on assets (9) 35 27 17 13 10 7 2 Debt/book value of debt & equity (%) 6 35 46 57 74 101 Current credit spreads (96) 0.2 0.8 1.2 1.5 2.5 3.5 5.0 What is an appropriate credit rating of the firm? Recent historical financial information for XYZ is presented below. Items are in 5 millions unless otherwise stated. Year 2016 2017 2018 Income statement Revenue 1,707 1,828 1,796 COGS 938 1,099 1.179 Gross Profit 769 729 616 S&A Expense 338 261 150 Earnings before interest, tax, depreciation and amortisation 431 468 466 (EBITDA) Earnings before interest and tax 345 385 (EBIT) 419 Net profit after tax (NPAT) 173 201 225 Earnings per share (cents) 36 42 54 Dividends per share (cents) 29 32 34 Balance sheet Shareholders' equity 820 1,021 1,246 Assets 1.800 2,001 2,226 Debt 980 980 980 The yield on 10-year Government bonds is 3.0%. You estimate the market risk premium at 5.0% and the equity beta of XYZ at 2. The corporate tax rate is 30%. You are considering an investment in XYZ, which currently trades at $3.55 per share. It has 420 million shares on issue. You anticipate that XYZ's reinvested earnings from 2018 will earn returns of 12% above its cost of equity capital in 2019, which is your first forecast year. That is, assume that today is 31 December 2018. Also assume that XYZ pays annual dividends. You expect XYZ returns on reinvested earnings will decline by 4% each year until abnormal returns are eroded. You also expect that XYZ dividend payout ratio will increase by 5% p.a. until it pays out 88%. You then expect this payout ratio to be maintained into perpetuity. XYZ's outstanding debt has ten years to maturity. They are semi-annual pay bonds. (Assume that there are no additional items in the accounts and the effective tax rate of the firm is the marginal tax rate) You have obtained the following data from Standard and Poors which shows the typical financial ratios associated with credit ratings of different levels. The table also shows the credit spread associated with these ratings in the current market. The spread is the additional return required over 10 year government bond rate, associated with these credit ratings. Ratio AAA AA A BBB BB B EBIT interest coverage 24 14 7 2 1 EBITDA Interest coverage 25 17 9 6 3 2 1 Debt EBITDA 0.2 1.1 1.7 2.4 3.8 5.6 7.4 Pre-tax return on assets (9) 35 27 17 13 10 7 2 Debt/book value of debt & equity (%) 6 35 46 57 74 101 Current credit spreads (96) 0.2 0.8 1.2 1.5 2.5 3.5 5.0 What is an appropriate credit rating of the firm