Please provide a substantial response for ALL questions Assume you are a fixed-i

Question

Please provide a substantial response for ALL questions

Assume you are a fixed-income analyst at an investment management firm. You are following the developments at two companies, Sturdy Machines and Patriot Manufacturing, which are both U.S.-based industrial companies that sell their products worldwide. Both companies operate in cyclical industries. Sturdy Machines' profits have suffered from a rising dollar and a slump in its business. The company has said that major cuts in its operating expenses are likely to be necessary if it is to make a profit next year. On the other hand, Patriot Manufacturing has been able to maintain its profitability and enhance its balance sheet. Selected data for both companies follow: Year Year Year Ratio 6 Sturdy Machines Cash flow/total debt (%) 37.3 31.0 33.0 Total debt/capital 38.2 40.1 41.3 Pretax interest 4.2 2.3 1.1 coverage (times) Patriot Manufacturing Cash flow/total debt (%) 34.6 38.0 43.1

Explanation / Answer

As a Fixed income anaylst I would recommend to buy bonds of Patriot Manufacturing. The fact that the ratings have been ungraded for the company from AAA to AAA gives a good financial condition for the company. Also the financials of the company has improved a lot from Year 5 to year 6 and year 7, the companies cashflow to debt ratio has is improving suggesting that the cash flows of the companies are increasing or the company is able to manage its finance needs from internal sources which suggest lower debt. The company has higher interest coverage ratio that is the earnings of the company are good enough to cover the interest expense of the company as compared to Sturdy Machines.

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