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Question 1: Given below is the interest coverage ratio for each credit slab and the corresponding spread over the risk free rate (5%) for large manufacturing firms. Your firm's market value is Rs 60,000. Currently the firm does not have any debt. Current EBITDA is Rs. 6,000 and depreciation is Rs. 2000. The firm plans to buy back half of its shares (pro rata - at market value) by issuing debt worth Rs. 25,000. What will be the credit rating of the debt issue. If B is considered as a risky rating, as a stock investor what would you advice this firm about its strategy to buy back. If the buy back has to be implemented, what proportion of the shares would you advise should be bought back?
Interest Coverage Ratio
Cr. Rating
Spread (Risk free rate -
5%)
> 8.50
AAA
0.20%
6.50 - 8.50
AA
0.50%
5.50 - 6.50
A+
0.80%
4.25 - 5.50
A
1.00%
3.00 - 4.25
A-
1.25%
2.50 - 3.00
BBB
1.50%
2.00 - 2.50
BB
2.00%
1.75 - 2.00
B+
2.50%
1.50 - 1.75
B
3.25%
1.25 - 1.50
B-
4.25%
0.80 - 1.25
CCC
5.00%
0.65 - 0.80
CC
6.00%
0.20 - 0.65
C
7.50%
< 0.20
D
10.00%
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