Use Market Insight (www.mhhe.com/edumarketinsight) to obtain the Standard & Poor's bond ratings of at least five firms in the database. Try to choose a sample that you think would have a wide range of bond ratings.
Start by opening the first firm's Annual Income Statement from the Excel Analytics Section. Download the data into Excel. Find the S&P Long-Term Issuer Credit Rating and the S&P Short-Term Issuer Credit Rating.
Now open the firm's Annual Balance Sheet. Download the data into Excel.
Use the data you gathered to calculate the financial ratios shown in Table 9.3 of the chapter.
Repeat the procedure for all five firms.
What is the relationship between bond rating and the ratios you calculated? Can you tell from your sample which ratios are relatively more important determinants of bond rating?
Go to www.mhhe.com/edumarketinsight and find the bond ratings (S&P Issuer Credit Rating) of McDonald's (MCD), Wendy's (WEN), and Landry's Restaurants (LNY) in the Compustat Reports Financial Highlights section. Now compare the financial ratios of the three firms using the Annual Ratios Report in the Excel Analytics section. Are the relative bond ratings of the three firms consistent with their financial ratios?
Use Altman's Z-score model for public firms, shown below, and the financial statements from Market Insight (www.mhhe.com/edumarketinsight) to calculate the Z-score for the firms in Problems 1 and 2. Based on the calculated Z-scores, assess the likelihood of bankruptcy for each firm. How well do the Z-scores match up with the bond ratings?
