ratings - SpecialCases Special Case No interest expenses No...

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Special Cases Page 1 Special Case No interest expenses, No debt Interest expenses, negative operating income No interest expenses, Debt on balance sheet Financial Service firms In general, you want to use an operating income (EBIT) one-time income or expenses and smooth ou
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Special Cases Page 2 Solution No problem. Your interest coverage ratio should be infinite and your rating should be AAA. Before you consider this unrealistic for your firm, recognize that with no debt, the cost of debt does not affec the cost of capital. The interest coverage ratio will be negative, leading to a rating of D. If the operating income is negative only in the most recent year, you might want to take the average operating income over the last few years and use it to compute an interest coverage ratio. This is weird but may reflect the fact that the debt was taken towards the end of the year or because the debt does not take the form of conventional interest-bearing debt. I would recommend that you compute an imputed interest expense Imputed interest expense = Debt on balance sheet * Interest rate on A rated debt I chose the A rating arbitrarily, but I would need the interest expense to get an interest rate.
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