Which of the following is an action company co-managers should seriously consider in trying to improve the company’s credit rating? (The financial meausre used in determining company credit ratings are discussed in the the Help document associated with page 5 Drone Journal.) of the Camera &
Using a portion on the company’s internal cash flows and new issues of common stock to pay higher dividends to shareholders
Not increasing the compensation paid to PAT members (until the desired credit rating is achieved)–this will help keep production costs for both cameras and drones from rising
Placing increased attention on improving operating profits and operating profit margins in all four geographic regions the resulting growth in opgating profits companywide will increase the company’s interest coverage ratio
Withdrawing all funds from the company’s retained eamings account on the balance sheet and using the cash to pay off bank loans
Increasing the size of the company’s dividend payments to stockholders–this helps reduce the amount of retained eamings on the company’s balance sheet (which in turn helps increase the company’s interest coverage ratio)
The Correct Answer and Explanation is :
The correct answer is:
Placing increased attention on improving operating profits and operating profit margins in all four geographic regions; the resulting growth in operating profits companywide will increase the company’s interest coverage ratio.
Explanation:
A company’s credit rating is fundamentally linked to its financial health, particularly its ability to meet financial obligations. The key financial measure influencing credit ratings is the interest coverage ratio, which indicates how well a company’s earnings can cover its interest expenses.
By improving operating profits and profit margins across all geographic regions, the company achieves several benefits:
- Higher Operating Profits: This increases the numerator in the interest coverage ratio, signaling to credit agencies that the company generates sufficient earnings to manage its debt-related interest payments.
- Improved Financial Stability: Strong operating performance reduces the risk of financial distress, a critical factor in credit rating evaluations.
- Enhanced Cash Flow: Improved profit margins lead to better cash flow management, which allows the company to pay down debt or reinvest in operations effectively.
Why Other Options Are Less Effective:
- Paying Higher Dividends: While this may please shareholders, it reduces the company’s available cash, potentially lowering financial flexibility and worsening credit metrics.
- Not Increasing PAT Compensation: Though this controls costs, it does not directly enhance operating profits or the interest coverage ratio.
- Withdrawing Retained Earnings: Using retained earnings to pay off loans reduces liabilities but also depletes reserves, which could harm the company’s financial stability.
- Increasing Dividend Payments: Similar to the first point, this reduces retained earnings but does not directly improve credit-relevant metrics like the interest coverage ratio.
Focusing on operating performance is a sustainable strategy to improve financial ratios, creditworthiness, and overall company health.