Some of Souter Corp.\'s ratios are given below: [Earnings from continuing operat

Question

Some of Souter Corp.'s ratios are given below:

[Earnings from continuing operations before interest and taxes] / [Gross interest incurred before subtracting (1) capitalized interest and (2)      interest income] : 1.95
[Long-term debt plus current maturities, commercial paper, and other short-term borrowings] / [Long-term debt plus current maturities, commercial paper, and other short-term borrowings + shareholders’ equity (including preferred stock) plus minority interest] : 38.67

What rating would you expect from Standard & Poor’s rating for Souter Corp.'s bonds?

Explanation / Answer

As Interest Coverage Ratio

[Earnings from continuing operations before interest and taxes] / [Gross interest incurred before subtracting (1) capitalized interest and (2)      interest income] : 1.95

is 1.95 , which means company's revenue is 1.95 times more than its interest obligation. So company's credibility is quite HIGH in term of debt repayment.

2. Debt to Asset Ratio is 38.67 which means Debt is 38.67% of total Assets. so Debtor will get their full money in case of liquidation. So company is quite strong in term of Debt Repayment.

As both these ratio are quity favorable, S&P should give AAA or AAA+ rating for this company

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