Assigning a Long-Term Debt Rating Using Financial Ratios

Refer to the information below from Nordstrom Inc.s 2016 financial statements. Use the information to answer the requirements ($ millions).

Sales					$15,539
Depreciation expense					591
Tax expense					407
Interest expense, gross					184
Earnings from continuing operations (Net income)					766
EBITA					1,376
Cash					626
Average total assets					9,916
Total debt					3,002
Noncurrent deferred tax liabilities					459
Noncontrolling interest					0
Equity					871
Dividends paid					1,185
Cash from operating activities					2,451

a. Compute the following seven Moodys metrics for Nordstrom. See Appendix 4A for definitions.

Round answers to one decimal place (example for percentage answers: 0.2345 = 23.5%).

Ratio			2016
EBITA to average assets			??%
Operating margin			??%
EBITA margin			??%
EBITA interest coverage			??
Debt to EBITDA			??
Debt to book capitalization			??%
Retained cash flow to net debt			??%

b. Use your computations from part a, along with measures in Exhibit 4.7, to estimate the long-term debt rating for Nordstrom.

Based on the above computations, the rating for Nordstrom's long-term debt would fall in the:

1. AAA - Aa range

2. A -Ba range

3. BA - B range

4. Can - range