Project Part IV

1. Determine a credit rating for Lotus Bakeries debt using the

European debt ratings prediction model (see Chapter 10, Table 10.8,
p. 425) and Lotus Bakeries 2014 unadjusted standardized consolidated
financial statements. (Please include a table showing your
computations using the European credit ratings prediction model.)
Varia
ble

Firm or debt
characteristic

Variable reflecting
characteristic

Coefficients
2.597
0.519

Firm size

2
3

Riskiness of profit
stream
Profitability

Model intercept
Natural logarithm of total assets
(billions)
Standard deviation of RoBA over
5 years
Return on business assets

Interest coverage

EBIT to interest expense

0.044

Leverage

Debt to capital

-0.765

Cash flow
performance

EBITDA to total debt

-0.004

-6.842
4.909

The debt rating score is calculated as follows:

debt score=2.597+0.519 16.842 2+ 4.909 3+0.044 40.765 50.004 6

The calculations for the different variables within the equation for the debt rating
score are based on the unadjusted statements of LB year 2014:
1)

1 = ln(336989/1000000) = -1.088

2)

2 = NOPAT/BA + NIPAT/BA
a.
b.
c.
d.
e.

RBA(2015)
RBA(2016)
RBA(2017)
RBA(2018)
RBA(2019)

=
=
=
=
=

34957.73/268334.66
32870.13/269784.20
30196.02/288343.56
26993.33/269600.72
23342.45/288019.85

+
+
+
+
+

12.93/268334.66
13.58/269784.20
14.12/288343.56
14.54/269600.72
12.36/288019.85

=
=
=
=
=

0.13
0.12
0.10
0.10
0.08

Standard deviation (2015 2019) = 0.02

3)

3 = NOPAT/BA + NIPAT/BA = 37395.00/246317.00 + 13.46/246317.00 =

0.15

Advanced Financial Statement Analysis

Fall 2015

4)

4 = (49433+587)/850 = 58.85

5)

5 = 45688.00/246317.00 = 0.19

6)

6 = (49433+587+14845)/45688.00 = 1.42

By inserting these variables

1 6

into the formula to obtain the debt rating

score, we obtain the following equation:

2.597+0.519 (1.088)6.842 0.02+ 4.909 0.15+ 0.044 58.850.765 0.190.004 1.42

= 5.058

The debt ratings prediction model gives us a score of 5.058. This is then converted
to a debt rating using the same model. As Lotus Bakeries score of 5.058 is larger
than 4.21 and lower than5.88, we predict Lotus Bakeries to have a debt rating of A.

2. Use your answer to question 1 and the average effective

interest rates for European firms reported in the textbook (see
Chapter 10, Table 10.4, p. 422) to estimate an effective interest
rate for Lotus Bakeries.
The obtained credit rating of 12.24 implies that Lotus Bakeries has an AAA rating,
which is rather high for a European country. We base our effective interest rate on
the table 10.4 on page 422, Business Analysis and Valuation IFRS Edition, Third
Edition. Here the AA-rated companies have an average interest expense to total
debt of 3.03%. As the difference between AAA-rated companies and AA-rated ones
is minimal, we can assume that Lotus Bakeries average interest rate is around
3.00%

3. Compute Lotus Bakeries effective interest rate for 2014 using

its unadjusted standardized consolidated financial statements.
The interest expenses paid by Lotus Bakeries in 2014 is 915.87. The effective
interest rate is calculated as follows:

effective interest rate=interest expense averagetotal debt

The average total debt is calculated as the average of the total debt of 2013 and
2014. The total debt itself is calculated by adding the current debt to the noncurrent debt of each year:
Advanced Financial Statement Analysis
Fall 2015

Non-current
debt
Current debt
Total debt

FY2014

FY2013

8,600.18

14,839.54

41,144.00
49,744.18

62,337.00
77,176.54

average total debt= (47,744.18 + 77,176.54) / 2 = 63,460.36

This results in the following effective interest rate:

effective interest rate=915.87 63,460.36=1.44

Lotus Bakeries effective interest rate is 1.44%, compared to the average interest
rate calculated in part 1 of 3.00%

4. Compare the effective interest rate you estimated in question 2

with the effective interest rate you computed in question 3. If
these rates differ, what can explain the difference?
Lotus has a low debt-to-capital rate (18.55%) and can borrow money in the market
at interesting rates. Therefore the effective interest rate after tax- the tax rate
applicable to Lotus Bakeries- is relatively low compared to the estimated tax rate.
Furthermore, the interest rates within Europe and Belgium are very low, flirting with
the 0.00% minimum. Lotus Bakeries will probably make use of the favorable
financial conditions by refinancing its debt obligations as well as taking out new
loans due to the fact that the interest payments will be relatively low.

Advanced Financial Statement Analysis

Fall 2015