Business Finance Discussion- Course Materials Only

Background and industry

B&GS Foods Inc. is a company that offers high-quality branded frozen and shelf-stable food and household products across Canada, Puerto Rico, and the United States (Reuters, 2019). BGS’s headquarters are Parsippany, New Jersey, United States. Some of the brands include Mrs. Dash, Cream of Wheat, and Vermont Maid Pancake syrup. Its competitors include Hormel Foods, The Kraft Heinz Co, and General Mills Inc. The current market capitalization stands at $1,079.59 million, and its P/E ratio is 6.63 (Morningstar, 2019).

Financial Leverage

The financial leverage is the extent to which fixed income securities and preferred stock are used in a firm’s capital structure (Robinson et al. 2012). The leverage ratios act as authentic tools to assess the ability of the firm to fulfill its financial obligations. Some of the financial leverage ratios encompass debt to assets, debt to equity, and interest coverage ratio.

Debt to asset Ratio

Debt to asset ratio is a leverage ratio that shows the percentage of assets that have been financed with debt (Drake & Fabozzi,2012). A high debt to asset ratio shows a degree of leverage and high financial risk. Creditors use this to identify the amount of debt in a particular company, the ability of BGS to repay debt, and if loans can be extended to the firm((Drake & Fabozzi,2012). The debt to asset ratio of the B&Gs Foods company was 0.62, 0.68, 0.57, 0.62, and 0.54 in the years 2014, 2015, 2016, 2017, and 2018, respectively. Over the five accounting years, the ratio fluctuates between 0.54 and 068. The ratio increased from 2014 to 2015, slightly declined from the years 2015 to 2016, and then rose from 2016 to 2017 before decreasing again from 2017 to 2018. Over the fiscal years, the B&GS’ debt to asset ratio is more than 50 %, which shows that more than 50% of assets are financed with debt. For instance, in 2018, 54% of the assets are financed with debt.

Debt to Equity Ratio

The debt to equity ratio measures the degree to which a firm can finance its operations using its financing options, debt financing, and equity financing. A high debt to equity, usually more than one, indicates that a company has been financing its operations using more debt financing than equity financing. A ratio of 1.0 means that the debt and equity, which equivalently indicates 50 percent of debt to equity financing. The B&GS’ debt to equity ratio was 3.04, 3.78, 2.20, 2.52, and 1.82 in the fiscal years 2014, 2015, 2016, 2017, and 2018, respectively. Throughout five years, there are no consistent patterns as the ratio fluctuates between 1.82 and 3.78, with the highest ratio in 2015, and the lowest in 2018. Worth noting, all the company’s debt to equity ratios are significantly higher than one, which reveals that the BGS’s liability is higher than equity. This is a big concern to creditors, and the management as B&GS Company seems to be highly leveraged less solvent and may have difficulty in fulfilling its long-term liabilities. A high debt to equity ratio indicates weaker solvency ((Drake, & Fabozzi, 2012)

Interest Coverage

The interest coverage ratio or time interest earned measures how many times a firm’s earnings before interest and taxes (EBIT) can cover its interest and lease payments (Drake & Fabozzi, 2012). If the interest coverage is higher, the more solvent a firm is. Solvency indicates the firm’s ability to pay the debt from operating income. The interest coverage of B&GS Company was 3.05, 3.37, 3.47, 2.61, and 1.51 for the years ended 2014, 2015, 2016, 2017, and 2018, respectively. The BGS’ company has a higher coverage ratio, which reveals stronger solvency; hence, this offers a greater assurance to its creditors that it can service its debt from its operating income (Robinson et al. 2012).

Evaluating B&GS’ Bond Performance

1) Two - Bonds Issued by

B&Gs Company issued one of its two corporate bonds on April 3rd, 2017. This corporate offers an annual coupon rate of 5.2500%, and its issue number is US05508RAE62 (Market Insider, 2019). The maturity date of this bond is March 4th, 2025, which depicts that it is an 8-year maturity bond. The number of coupon payments of this corporate bond will be made at 2per year, whereby the coupon start date was on of October 1st, 2017, and the final coupon date will be 31st March 2025. According to the Market Insider (2019), the issue price of BGS’ bond issue price was $100.00, and the expected yield is 5.10%. The reported issue volume 500 million (B+G FOODS INC.(NEW)2025)The BG’S. Bond was issued on 5/3/2013 with an amount of $5,500 million (USD APPLE INC.DL-NOTES 2013(13/23) (Markets Insider, 2019).

The second corporate bond issued by BGS Company is referenced with an issue number US05508WAB19 and with a name B+G FOODS 19/27(Market Insider, 2019). A 550 million of this corporate bond were issued on September 26th, 2019, whereby the reported issue price was $100.00.The maturity date is March 15th, 2027. The coupon rate at of 5.2500% and the expected yield is 5.68% (Market Insider, 2019). The number of coupon payments per year will also be two twice-yearly, with the initial payment being due March 15th, 2020. The final coupon date is on 14th September 2027. Notably, both corporate bonds have no floater, which means that the coupon rate remains the same regardless of the prevailing economic conditions.

2) Last Price of the Bond if we assume that the Par Value of the Bond is $1,000.

Par value is the amount of the money that issuers approve to pay back the bond’s investors at maturity. The par value of a bond is critical in determining the magnitude of coupon payments as well as the maturity value. The settlement date for the first corporate bond was on 4/3/2017 with a par value of $1,000.00, issued for a redemption value of $100.00, and with a maturity date of 4/1/2025. The associated annual coupon rate and market yields are 5.2500% and 5.10%, respectively. From the computation, the corporate bond will be priced at $404.94 annually. It is vague that BGS’s last price of the bond issued on 4/3/2017 is $270.40

The second corporate bond with the settlement date is 9/26/2019, with an 8- year maturity date that falls on 9/15/2027, a coupon rate of 5.250 %, and a market yield of 5.68%, its price was $100.00. The bond’s last price would be $396.76 annually

Semi-Annual Coupon/Interest Payments if the Par Value is $1,000.

The par value of a bond is critical in determining the magnitude of coupon payments (Both the first and the second corporate bonds have a coupon rate of 5.2500%. The coupon rate payment is computed by multiplying the par value with the coupon rate; Coupon payment = Par value * coupon rate. Therefore, the coupon payments for each bond is $52.50 (5.25%*$1000).

Current Yield of the Bonds if the Par Value is $1,000.

The current yield of a bond is computed by dividing the annual coupon payment by the bond’s current market value (Boyte-White, 2018). To calculate the current return of the first and second B&GS’ corporate, plug in the value of coupon payment and the market value. For the first bond, the market value is $404.94, while that of the second one is $461.17. The current yield of the first corporate bond is 7.71%, ($404.94/ $52.5 =7.71). The current return of the second corporate bond is 8.78%, ($461.17/ $52.5 =8.78). The yield represents the effective interest rate on B&G’s bond. This number can be reflected off the profitability of a bond relative to other bonds in the market like Alphabet Inc.

Analysis of B&Gs Foods Issued Bonds

From my study, I would choose the first corporate bond since it has a low-interest rate. Intuitively, a low-interest rate is inversely related to the bond prices, and as a result, the first bond is considerably higher priced than the second. The lower the bond interest rate, the higher the price, as well as the higher return. In this scenario, the lower the yield to maturity rate, the less likely it the bond B&G issued is of high quality.

On the other hand, a callable bond is a bond that is redeemable before its maturity. For both bonds, they have a fixed interest rate regardless of the prevailing market conditions. The interest rates will never decline. Markedly, both bonds may are redeemable. The benefits that may be reaped will be due to the resurgence of bond prices but not increased interest rates.

Stock Performance

The stock price of B&Gs Food Company has recently and slightly dropped to a low of $16.87 on December 6, 2019. Its primary competitor, Hormel Food Corporation (NASDAQ: HRL) have a higher stock price with a low of $45.33 and with fewer fluctuations, and as a result, the market has exhibited positive sentiments towards Hormel’s growth.

A sustainable growth rate is the highest rate of growth rate that a business organization can sustain to finance its expansion and growth without getting more debt financing or equity financing. It is calculated using the formula; sustainable growth rate (g) = ROE *(1- Dividend payout ratio). The company’s sustainable growth rate increased in from 2016 to 2017, and then significantly dropped in 2018. The high sustainable growth rate in 2017 means that the company grew fast, however, it may have siphoned a lot of cash in the expansion, and therefore there was no adequate cash to invest in prospective projects.

Client Recommendation

B & G Food’s financial and stock performance shows that they have enough strength to guarantee to enter into long– term investment either in bonds or stock. According to the data, the company’s stock performance indicates that B & G Food would be at low risk if the customer decided to invest in the current bond.

The interest rate is low, which means investors are at a lower risk. CAPM and Dividend Payout ratio is at a good percentage showing that when investors invest will get a greater return on their investment. B & G Food financial leverage ratio shows a healthy future and greater confidence in investors. Overall, B&G’s offers an incredibly cheap and profitable investment for any investor.

Recommendation for B & G Food’s management team

B & G Food has to ensure their innovation is strong by investing more funds into research and development to gain a competitive edge in the market. B&G needs to adopt aggressive strategies to steer, spark growth, and to have a strong foot in intensive competitive market and industry. Hormel Foods Corporation is more attractive to investors than investors, and it's market capitalization, and revenues are more than five folds of B&G Foods. Some of the ways that B&G Foods company can increase its efficiency and enhance its competitive edge is through increasing the P/E ratio, reducing the cost of sales, full utilization of affordable debt, rising interest coverage ratio, lowering debt to equity ratio, and increasing the book per share.

Reflection of assignment

References

Robinson, T., Henry, E., Pirie, W.,& Broihahn, M.A. (2012).International Financial Statement

Analysis( 2 nd ed.). Hoboken, N.J.: John Wiley & Sons, Inc.

Drake, P., & Fabozzi, F.(2012). Analysis of financial statements (3rd ed.). Hoboken, N.J.: John

Wiley & Sons, Inc.

Hawawini, G., & Viallet C.(2011). Finance for Executives: Managing for Value Creation.

(4th ed.). New York, NY. Cengage Learning