Anies strive to maintain an investment grade credit

Info icon This preview shows pages 24–27. Sign up to view the full content.

View Full Document Right Arrow Icon
anies strive to maintain an "investment-grade" credit rating. This allows them to sell their to institutional investors such as pension, mutual and other investment funds. Many insti- - nal investors will not invest in bonds that are rated below investment-grade rating of Baa3 y's) or BBB- (S&P and Fitch). To achieve a higher credit rating, companies must have T financial leverage and maintain greater liquidity. This is costly to shareholders. As a result, cial managers face a difficult task in finding the optimal capital structure that maximizes s to shareholders while reducing the cost of debt capital. The data suggest that corporate CFOs try to maintain investment-grade bond ratings but do rely markedly on costly equity capital. Following is a graph of the distribution of companies s bond ratings. Ratings of A and Baa account for nearly half of all corporate issuers, while issuers in the top ratings categories (Aaa and Aa) account for 14% of corporate issuers ce: Moody's financial metrics 2010). 25% 20% 15% 10% 5% O%~-----r----~----~----r-----r----.L-----( IFRSAlert Unlike GAAP, IFRS requires that companies treat the conversion feature like an option and revalue it each period using the appropriate market rate. The difference in value each period is recorded as nonoperating revenue or expense.
Image of page 24

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
7-25 Module 7 I Liability Recognition and Nonowner Financing Trends in Financial Ratios Over Time Many of the ratios we discuss above vary over time with changes in the level of rnacroeconomi activity. For example, financial leverage (as measured by, average assets / average equity declined during the recovery following the recession of 2001, then increased as equity declined in the recessionary period of 2007-2008, see below. Measures of profitability and interest cov- erage exhibited similar trends. Average Assets/Average Equity by Moody's Rating-Median of Changes 25.0% .Aaa&Aa A .Baa .Ba.B 5.0% 20.0% 15.0% 10.0% 0.0% -5.0% -10.0% -15.0% 250 0/ ~) ) j j j j j I -./0 I r I r I r i 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Changes in the level of financial leverage also differed across industries as shown below. Spe- cifically, capital-intensive industries, such as transportation and capital goods reduced finan - leverage during the recovery to a much greater extent than did retail and other consumer-rel industries. Average Median of Changes-Average Assets/ Average Equity, Baa Moody's Rated, 2002-2007 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% -16.0% -18.0% -20.0% V ,/ ( ( ,/ ( ,/ ( ( Baa Total Capital Consumer Energy & Media & Retail & Technology Transportation Industries Industries Environment Publishing Distribution Source: Moody's Financial Metrics Financial Ratios across Industries Financial ratios also differ across industries as demonstrated in the following graphic:
Image of page 25
Module 7 I Liability Recognition and Nonowner Financing 7-26 Median Moody's Baa EBITAIAverage Assets - .J r~ '1 f''' ! , -, , ., -. I , I / Aggregate Aaa z.aospace & Defense Aggregate Aa Healthcare Aggregate A ~umer Products ~I & Distribution Services --;eerommunications Manufacturing Aggregate Baa Chemicals Aggregate Ba =-.agy & Environment Metals & Mining Media Transportation Aggregate B Automotive Aggregate Caa-C 0.0% 15.0% 20.0% 25.0% 5.0% 10.0% : Moody's Financial Metrics
Image of page 26

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 27
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern