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. 2017 S Alpine Chemical Company Financial Statements Years Ended December 31, (S in millions) 2012 2013 2014 2015 2016 Assets Cash $ 190 S 55 S O $ 157 S 249 Accounts receivable 1,637 2.087 1,394 2,143 3,493 Inventories 2,021 945 1.2581.293 1.322 Other current assets 17 27 55 393 - 33 Current assets 3,865 3,114 2,7073,986 5,097 Gross fixed assets 4,650 5,038 5,6195,757 6,181 Less: Accumulated depreciation 2,177 2,543 2,841 3,138 3,465 0 3,451 1.643 171 5,265 7,187 - 3,893 Net fixed assets 2,473 2,495 2,778 2,619 2716 3,294 $ 6,338 $ 5,609 $ 5,485 $ 6,605 $ 7,813 $ 8,559 Total assets Liabilities and net worth $ Notes payable Accounts payable 525 673 $ 750 638 $0 $ 1,300 $ 1,750 $ 1,900 681 338 743 978 Accrued liabilities Current liabilities Long-term debt 303_ 1,501 1,985 172 1.560 1,044 3 59 1,040 1,401 359 1,997 1,457 483 2,976 1,542 761 3,639 1,491 _ Deferred tax credits Total liabilities Common stock Capital surplus 352 3,838 50 100 347 363 2.951 2.804 50 100 1000 336 3,790 100 0 345 4,863 100 354 5,484 100 0 Retained earnings 2,350 2,508 2,581 2,715 2,850 2.975 2,500 2,658 2,681 2,815 2,950 3,075 Net worth Total liabilities and net worth $ 6,338 $ 5,609 $ 5,485 $ 6,605 $ 7,813 $ 8,559 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 2012 $ 14,100 10,200 3,900 2,065 1,835 275 475 1,085 193 $ 892 2013 $15,508 11,220 4.288 2.203 2,085 465 477 1,143 115 $ 1,028 2014 $13,875 9,366 4,509 2,665 1,844 275 479 1,090 265 $ 825 2015 $14,750 10,059 4,691 2.685 2,006 319 478 1,209 145 $ 1,064 2016 $19,133 13,400 5,733 3,472 2,261 376 495 1,390 192 $ 1,198 2017 $19,460 13,117 6,343 3,885 2,458 318 511 1,629 150 $ 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 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. (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 into Table 1 that follows. Then from Table 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) TABLE 1 Alpine Chemical Company 2012 4.95 2013 3.46 201 4 4.96 2015 4.79 2016 4.70 2017 44% 28% 34% 34% 34% EBIT/Interest expense Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 54% 13% 84% 13% 93% 13% 56% 14% 51% 12% TABLE 2 Industry Data Three-Year Medians (2015-2017) by Credit- Rating Category Bb 2.0 EBIT/Interest expense 11.0 - 13.0 9.5 16. 5 A Bbb 4.5 3.0 39. 29.5 0 1.0 63. 5 Long-term debt/Total capitalization 45.5 Funds from operations/Total debt 74. 31. 83. 0 0 45.5 5 18.5 8.0 16. 12. 21. 50 15. 00 11.0 9.0 Operating income/Sales iv. Are the operating profits (EBITD) of Alpine keeping pace with sales? Comment on the growth increase/decrease) of sales and operating profits in 2017 in respect to the prior years. Show all your workings, including percentages (workings to be tabulated). (6 marks) V Compute and comment on the days receivables outstanding using year-end receivables for each year in the schedule. Use additional ratios to comment on the accounts receivables of Alpine (for example, comparing sales growth and accounts receivable growth in 2017 relative to the earlier years). (9 marks) vi. Show the cash flow from operating activities of Alpine Chemical Company in 2017 (for this part of the requirement, assume all net sales are credit sales; accrued liabilities include operating expense, interest expense and income taxes, and no prepaid expenses). Taking into account your computations and comments in parts (iv), (v) and (vi), comment on the overall liquidity and cash flow position of Alpine Chemical Company in 2017. (14 marks) vii. Identify the accounts that most likely would require further disclosure in the notes to the financial statements in an annual report, and describe what information would have to be disclosed in those notes by Alpine Chemical Company before the statements can be included as part of the annual report for presentation to its stockholders, and that may assist prospective investors in decision-maki (10 marks)