Question

You are a pension fund manager looking for an investment that will provide a reliable stream of income over the next 5 years. You want to find the best yield possible while still conforming to the pension fund covenant of investing in investment grade bonds or better. Decide among the following investment options for your fund.

a. Eastern Telecommunications Inc.: 5 years, 10% yield, EBIT Interest Coverage ratio = 4.4, EBITDA interest coverage ratio = 5.8, total debt of $72,625,000 (all of which is long term), total equity of $175,000,000, and a return on equity (ROE) of 7.9%.

b. Anderson Nuclear Power: 5 years, 15% yield, EBIT Interest Coverage ratio = 0.75, EBITDA interest coverage ratio = 0.9, total debt of $48,000,000, total equity of $70,000,000, and a return on capital (ROE) of 7.8%.

c. Titan Tech Company: 5 years, 6% yield, EBIT Interest Coverage ratio = 24.1, EBITDA interest coverage ratio = 30.5, total debt of $90,000,000 (all of which is long term), total equity of $1,500,000,000, and a return on equity (ROE) of 19.9%.

The following table shows the three-year median ratios for U.S. Industrials with long-term debt. Use the table to discuss the pros and cons of each investment option, described above. Determine the grade of each bond (as closely as you can). Which bond is appropriate for your pension fund?

	AAA	AA	A	BBB	BB	B	CCC
EBIT interest coverage	21.4	10.1	6.1	3.7	2.1	0.8	0.1
EBITDA Interest Coverage	26.5	12.9	9.1	5.8	3.4	1.8	1.3
Return on Equity (%)	34.9	34.9	19.4	13.6	11.6	6.6	1.0
long term debt/equity (%)	13.3	13.3	33.9	42.5	57.2	69.7	69.8
Total debt/equity (5)	22.9	22.9	42.5	48.2	62.6	74.8	87.7

Answer:

a. Eastern Telecommunications Inc.:

b. Anderson Nuclear Power:

c. Titan Tech Company

d. Summary recommendation:

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE