Answer Happy

Problem 13-12
Mike Smith, CFA, an analyst with Blue River Investments, is
considering buying a Montrose Cable Company corporate bond. He has
collected the balance sheet and income statement information for
Montrose as shown in Table 1 below.
He has also calculated the three ratios shown in Table 2 below,
which indicate that the bond is currently rated "A" according
to the firm's internal bond-rating criteria.
Smith has decided to consider some off-balance-sheet items in
his credit analysis, as shown in Table 3.
Table 3 Montrose Off-Balance-Sheet Items
Specifically, Smith wishes to evaluate the impact of each of the
off-balance-sheet items on each of the ratios found in Table 2.
Assume that the "loan proceeds" from the financed receivables would
be invested at interest rate of 10 percent.
Calculate the combined effect of
the three off-balance-sheet items in Table 3
on each of the
following three financial ratios shown in Table
2. Do not round intermediate calculations. Round your answers to
four decimal places.
Evaluate whether or not the credit yield premium incorporates
the effect of the off-balance-sheet items, state and justify
whether or not the current credit yield premium compensates Smith
for the credit risk of the bond, based on the internal bond-rating
criteria found in the firm's internal bond-rating criteria.
Round your answers to the nearest whole number.
The current rating of the Montrose bond as an
"A" -Select-does not incorporateincorporateItem 10 the
effect of the off-balance-sheet items, and the current credit yield
premium of 50 basis points -Select-isis notItem
11 sufficient to compensate Smith for the credit risk of the
bond.