You Are a Pension Fund Manager Looking for an Investment

Essay

You are a pension fund manager looking for an investment vehicle that will provide your fund with a reliable stream of income over the next 10 years. You want to find the best yield possible while still conforming to the pension fund covenant of investing in investment grade bonds or better. You are trying to decide between the following investment options for your equity:
A. Diner by the Sea
10 years, 5.5% yield, EBIT Interest coverage ratio = 4.0, EBITDA Interest coverage ratio = 6.0, total debt of $480,000,000 (all of which is long term), total equity of $1,000,000,000, and a return on equity of 8.3
B. Perfect Home Products
10 years, 2.5% yield, EBIT Interest coverage ratio = 22.0, EBITDA Interest coverage ratio = 31.0, total debt of $320,000,000 (all of which is long term), total equity of $10,000,000,000, and a return on equity of 25.0
C. Cell Phone Supplies, Inc.
10 years, 8.5% yield, EBIT Interest coverage ratio = 0.78, EBITDA Interest coverage ratio = 1.3, total debt of $210,000,000, total equity of $320,000,000, and a return on equity of 8.2
Using the table below, discuss each investment option's pros and cons, attempt to determine the grade of each bond, and ultimately make an argument for which bond is the appropriate investment for your pension fund. Note: Bonds rated BB, or lower, are considered to be non-investment grade bonds.