Margaret OFlaherty, 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)	20X1			20X2			20X3			20X4			20X5			20X6
Assets
Cash	$	190		$	55		$	0		$	157		$	249		$	0
Accounts receivable		1,637			2,087			1,394			2,143			3,493			3,451
Inventories		2,021			945			1,258			1,293			1,322			1,643
Other current assets		17			27			55			393			33			171
Current assets		3,865			3,114			2,707			3,986			5,097			5,265
Gross fixed assets		4,650			5,038			5,619			5,757			6,181			7,187
Less: Accumulated depreciation		2,177			2,543			2,841			3,138			3,465			3,893
Net fixed assets		2,473			2,495			2,778			2,619			2,716			3,294
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		673			638			681			338			743			978
Accrued liabilities		303			172			359			359			483			761
Current liabilities		1,501			1,560			1,040			1,997			2,976			3,639
Long-term debt		1,985			1,044			1,401			1,457			1,542			1,491
Deferred tax credits		352			347			363			336			345			354
Total liabilities		3,838			2,951			2,804			3,790			4,863			5,484
Common stock		50			50			100			100			100			100
Capital surplus		100			100			0			0			0			0
Retained earnings		2,350			2,508			2,581			2,715			2,850			2,975
Net worth		2,500			2,658			2,681			2,815			2,950			3,075
Total liabilities and net worth	$	6,338		$	5,609		$	5,485		$	6,605		$	7,813		$	8,559

Income statement	20X1			20X2			20X3			20X4			20X5			20X6
Net sales	$	14,100		$	15,508		$	13,875		$	14,750		$	19,133		$	19,460
Cost of goods sold		10,200			11,220			9,366			10,059			13,400			13,117
Gross profit		3,900			4,288			4,509			4,691			5,733			6,343
Operating expense		2,065			2,203			2,665			2,685			3,472			3,885
Operating income		1,835			2,085			1,844			2,006			2,261			2,458
Interest expense		275			465			275			319			376			318
Depreciation expense		475			477			479			478			495			511
Profit before tax		1,085			1,143			1,090			1,209			1,390			1,629
Income taxes		193			115			265			145			192			150
Net income	$	892		$	1,028		$	825		$	1,064		$	1,198		$	1,479

Required:

1. Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 20X6:
   1. EBIT/Interest expense
   2. Long-term debt/Total capitalization at December 31
   3. Funds from operations/Total debt
   4. 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.
2. 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
	20X1		20X2		20X3		20X4		20X5		20X6
EBIT/Interest expense	4.95		3.46		4.96		4.79		4.70		?
Long-term debt/Total capitalization	44	%	28	%	34	%	34	%	34	%	?
Funds from operations/Total debt	54	%	84	%	93	%	56	%	51	%	?
Operating income/Sales	13	%	13	%	13	%	14	%	12	%	?

Table 2: Industry Data
Three-Year Medians (20X420X6) by Credit-Rating Category
	AAA		AA		A		BBB		BB		B
EBIT/Interest expense	11.0		9.5		4.5		3.0		2.0		1.0
Long-term debt/Total capitalization	13.0		16.5		29.5		39.0		45.5		63.5
Funds from operations/Total debt	83.0		74.0		45.5		31.5		18.5		8.0
Operating income/Sales	21.5		16.0		15.0		12.0		11.0		9.0