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, 20x3 20X4 20x1 20x2 20XS 20X6 ($ in millions) Assets Cash Accounts receivable Inventories Other current assets Current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets $ $ 190 1,637 2,021 17 3,865 4,650 2,177 2,473 $ 6,338 $ 55 2,087 945 27 3,114 5,038 2,543 2,495 $5,609 $ 0 1,394 1,258 55 2,707 5,619 2,841 2,778 $5,485 $ 157 2,143 1,293 393 3,986 5,757 3,138 2,619 $6,605 $ 249 3,493 1,322 33 5,097 6,18 3,465 2,716 $ 7,813 $ 0 3,451 1,643 171 5,265 7,187 3,893 3,294 $8,559 $1,750 743 Total assets Liabilities and net worth Notes payable Accounts payable Accrued liabilities Current liabilities Long-term debt Deferred tax credits Total liabilities Common stock Capital surplus Retained earnings Net worth $ 525 673 303 1,501 1,985 352 3,838 50 100 2,350 2,500 $6,338 $ 750 638 172 1,560 1,044 347 2,951 50 100 2,508 2,658 $5,609 $ 0 681 359 1,040 1,401 363 2,804 100 0 2,581 2,681 $5,485 $1,300 338 359 1,997 1,457 336 3,790 100 0 2,715 2,815 $6,605 483 2,976 1,542 345 4,863 100 0 2,850 2,950 $ 7,813 $1,900 978 761 3,639 1,491 354 5,484 100 0 2,975 3,075 $ 8,559 Total liabilities and net worth Income statement Net sales Cost of goods sold Gross profit Operating expense Operating income Interest expense Depreciation expense Profit before tax Income taxes Net income 20x1 $14,100 10,200 3,900 2,065 1,835 275 475 1,085 193 $ 892 20X2 $15,508 11, 220 4,288 2,203 2,085 465 477 1,143 115 $ 1,028 20X3 $13,875 9,366 4,509 2,665 1, 844 275 479 1,090 265 $ B25 20x4 $14,750 10,059 4,691 2,685 2,006 319 478 1,209 145 20X5 $19,133 13,400 5,733 3,472 2,261 376 495 1,390 192 $ 1,198 20X6 $19,460 13,117 6,343 3,885 2,458 318 511 1,629 150 $ 1,479 $ 1,064 Required: 1. Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 20x6: a. EBIT/Interest expense b. Long-term debt/Total capitalization at 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. 3. 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 20x3 4.96 EBIT/Interest expense / Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 20x1 4.95 44 54% 138 20X2 3.46 28 84% 132 20X4 4.79 348 56 14 20X5 4.70 34% 51% 12% 20x6 2 ? 2 ? ? 93% 133 Table 2: Industry Data Three-Year Medians (20X4-20X6) by Credit-Rating Category AAA EBIT/Interest expense 11.0 Long-term debt/Total capitalization 13.0 Funds from operations/Total debt 83.0 Operating income/Sales 21.5 AA 9.5 16.5 74.0 16.0 A 4.5 29.5 45.5 15.0 BBB 3.0 39.0 31.5 12.0 BB 2.0 45.5 18.5 11.0 B B 1.0 63.5 8.0 9.0 Complete this question by entering your answers in the tabs below. Required 1 Required 3 Insert your answers to requirement 1 into Table 1 that follows. Then from Table 2, select an appropriate credit rating for Alpine Chemical. (Round percentage answers to nearest whole percent. Round "EBIT/Interest Expense" answer to two decimal places.) Alpine Chemical Company 20X3 20X1 20X2 20X4 20X5 20X6 Credit Rating 4.95 3.46 4.96 4.79 4.70 4.12 x A 44 % 28 % 34 % % 34 % 34 % 34% A X EBIT/Interest expense Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 54 % 84 % 1 % 56 % 51 % % 59% A 93 13 13 % 13 % % 14 % 12 % 13% | A
