Margaret O$$Flaherty$,$ a portfolio manager for MCF Investments, is considering investing in Alpine Chemical $7\%$ bonds, which mature in $10$ years. She asks you to analyze the company to determine the riskiness of the bonds.

Alpine Chemical Company Financial Statements

Years Ended December $31,$

$($$ in millions$)20$X$120$X$220$X$320$X$420$X$520$X$6$

Assets

Cash $ $190$ $ $55$ $ $0$ $ $157$ $ $249$ $ $0$

Accounts receivable $1,6372,0871,3942,1433,4933,451$

Inventories $2,0219451,2581,2931,3221,643$

Other current assets $17275539333171$

Current assets $3,8653,1142,7073,9865,0975,265$

Gross fixed assets $4,6505,0385,6195,7576,1817,187$

Less: Accumulated depreciation $2,1772,5432,8413,1383,4653,893$

Net fixed assets $2,4732,4952,7782,6192,7163,294$

Total assets $ $6,338$ $ $5,609$ $ $5,485$ $ $6,605$ $ $7,813$ $ $8,559$

Liabilities and net worth

Notes payable $ $525$ $ $750$ $ $0$ $ $1,300$ $ $1,750$ $ $1,900$

Accounts payable $673638681338743978$

Accrued liabilities $303172359359483761$

Current liabilities $1,5011,5601,0401,9972,9763,639$

Long$-$term debt $1,9851,0441,4011,4571,5421,491$

Deferred tax credits $352347363336345354$

Total liabilities $3,8382,9512,8043,7904,8635,484$

Common stock $5050100100100100$

Capital surplus $1001000000$

Retained earnings $2,3502,5082,5812,7152,8502,975$

Net worth $2,5002,6582,6812,8152,9503,075$

Total liabilities and net worth $ $6,338$ $ $5,609$ $ $5,485$ $ $6,605$ $ $7,813$ $ $8,559$

Income statement $20$X$120$X$220$X$320$X$420$X$520$X$6$

Net sales $ $14,100$ $ $15,508$ $ $13,875$ $ $14,750$ $ $19,133$ $ $19,460$

Cost of goods sold $10,20011,2209,36610,05913,40013,117$

Gross profit $3,9004,2884,5094,6915,7336,343$

Operating expense $2,0652,2032,6652,6853,4723,885$

Operating income $1,8352,0851,8442,0062,2612,458$

Interest expense $275465275319376318$

Depreciation expense $475477479478495511$

Profit before tax $1,0851,1431,0901,2091,3901,629$

Income taxes $193115265145192150$

Net income $ $892$ $ $1,028$ $ $825$ $ $1,064$ $ $1,198$ $ $1,479$

Required:

Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for $20$X$6$:

EBIT$/$Interest expense

Long$-$term debt$/$Total capitalization at December $31$

Funds from operations$/$Total debt

Operating income$/$Sales

Use the following conventions: EBIT is earnings before interest and taxes; Total capitalization is interest$-$bearing long$-$term debt plus net worth; Funds from operations means net income plus depreciation expense; and Total debt includes interest$-$bearing short$-$term and long$-$term debt.

Insert your answers to requirement $1$ into Table $1$ that follows. Then from Table $2,$ select an appropriate credit rating for Alpine Chemical.

Table $1$: Alpine Chemical Company

$20$X$120$X$220$X$320$X