Determining Bond Rating

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Altria Group, formerly known as Philip Morris Companies, is a major manufacturer and distributor of consumer products. It has a history of steady growth in sales, earnings, and cash flows. In recent years Altria has diversified with acquisitions of Miller Brewing and General Foods. In Year 8, Altria acted to further diversify by announcing an unsolicited cash tender offer for all the 124 million outstanding shares of Kraft at $90 per share. After negotiation, Kraft accepts a $106 per share all-cash offer from Altria. Assume you are an analyst with Investment Services, and that soon after the cash tender offer you are requested by your supervisor to review the potential acquisition of Kraft and assess its impact on Altria’s credit standing. You assemble various information using the following projected Year 8 and Year 9 financial data:


a. You arrange a visit with Altria management. Given the information you have assembled above, identify and discuss five major industry considerations you should pursue when questioning management.

b. Additional information is collected showing median ratio values along with their bond rating category for three financial ratios. Using this information reported in the excerpt below along with the projections above:

(1) Calculate these same three ratios for Altria for Year 9 using:

(a) Amounts before accounting for the Kraft acquisition.

(b) Consolidated amounts after the Kraft acquisition.

(2) Discuss and interpret the two sets of ratios from 1 compared to the median values for each bond rating category. Determine and support your recommendation on a rating category for Altria after the Kraft acquisition.

Additional Information:


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