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 analyse the company to determine the riskiness of the bonds.

Alpine Chemical Company Financial Statements

Years Ended December 31,

($ in millions) 2012

2013

2014

2015

2016

2017

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 2012

2013

2014

2015

2016

2017

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:

i.Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 2017:

a.EBIT/Interest expense

b.Long-term debt/Total capitalizationat December 31

c.Funds from operations/Total debt

d.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.(8 marks)

ii.Briefly explain the significance of each ratio calculated in requirement (i) to the assessment of Alpine Chemical's creditworthiness.(8 marks)

iii.Insert your answers to requirement 1 intoTable 1that follows. Then fromTable 2, select an appropriate credit rating for Alpine Chemical, and comment on the performance of Alpine in relation to each of the ratios, and on the overall performance of the company.

(15 marks)