Question: (Choosing financial targets) Sanderson Manufacturing Company would like to achieve a capital structure consistent with a Baa2/BBB senior debt rating. Sanderson has identified six comparable firms and calculated the credit statistics shown here.
a. Sanderson’s return on assets is 5.3%. It has a total capitalization of $600 million. What are reasonable targets for long-term debt/cap, funds from operations/LT debt, and fixed charge coverage?
b. Are there any firms among the six who are particularly good or bad comparables? Explain.
c. Suppose Sanderson’s current ratio of long-term debt to total cap is 60% but its fixed charge coverage is 3.00. What would you recommend?
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FIRM
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A B
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D
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E
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F
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Senior debt rating
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Baa2/BBB Baa3/BBB- Baa2/BBB Baa1/A- Baa1/BBB-
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Baa2/BBB+
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Return on assets
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5.2% 5.0%
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5.4%
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5.7%
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5.2%
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5.3%
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Long-term debt/cap
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38% 41%
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45%
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40%
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25%
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43%
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Total cap (SSIN)
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425 575
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525
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650
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210
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375
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Funds from operations/IX ckbt
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39% 43%
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28%
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4696
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57%
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43%
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Fixed charge cow
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2.57 2.83
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2.75
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2.38
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3.59
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2.15
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