Reference no: EM132465761

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:

Selected data for both companies follow:
Rano	Tears	Tear 6	Year
Mardi Manes
Cash flow/total debt (%)..............	37.3	31.0	33.0
Iota! debt/capital V%)..................	382	10.1	11.3
Pretax interest coverage (times) .....	42	2.3	1.1
Patriot Manufacturing
Cash floor/total debt (%)..............	34.6	38.0	43.1
Total debt/capital (%)..................	40.0	31.3	31.9
Pretax interest coverage (times)	1.7	4.5	6.1

You are monitoring the bonds of these companies for possible purchase. You notice that a rating agency recently downgraded the senior debt of Sturdy Machines from AA to A and upgraded the senior debt of Patriot Manufacturing from AA to AAA. You received the following yield quotes from a broker:

Sturdy Machines 7.50% due June 1, 2008, quoted at 7.10%.

Patriot Manufacturing 7.50% due June 1, 2008, quoted at 7.10%.

Required:

Question 1: Recommend which of the above bonds you should buy. Justify your choice with reference to at least two ratios and two qualitative factors from the information provide