Question: Margaret O’Flaherty, a portfolio manager for
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.
Required:
1. 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.
2. Briefly explain the significance of each ratio calculated in requirement 1 to the assessment
of Alpine Chemical’s creditworthiness.
3. Insert your answers to requirement 1 into Table 1 that follows. Then from Table 2, select
an appropriate credit rating for Alpine Chemical.
Transcribed Image Text:
Alpine Chemical Company Financlal Statements Years Ended December 31, (S In milons) 2012 2013 2014 2015 2016 2017 Assets $ 190 1,637 OS 157 1,394 1,258 Cash $ 249 3,493 1,322 55 Accounts receivable 2,087 2,143 1,293 3,451 1,643 Inventories 2,021 945 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 Less: Accumulated depreciation 4,650 2,177 5,038 5,619 2,841 5,757 3,138 6,181 3,465 7,187 3,893 2,543 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 S 8,559 Liabilities and net worth Notes payable Accounts payable 24 525 $750 $0 $ 1,300 S 1,750 $ 1,900 673 638 681 338 743 978 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 1044 1,401 1,457 1,542 1,491 Deferred tax credits 352 347 363 336 345 354 Total liabilities 3,838 2,951 2,804 100 3,790 100 4,863 100 5,484 Common stock Capital surplus Retained earnings 50 50 100 100 100 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 S 7,813 S 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 4,288 6,343 Gross profit Орегrating ex pense 3,900 4,509 4,691 5,733 2,065 2,203 2,665 2,685 3,472 3,885 1,835 Operating income Interest expense 2,085 1,844 2,006 2,261 2,458 275 465 275 319 376 318 depreciation ex pense 475 477 479 478 495 511 Profit before tax 1,085 1,143 1,090 1,209 145 1,390 1,629 193 24 Income taxes 115 265 192 150 Net income 892 $ 1028 825 S 1,064 $ 1,198 $ 1,479 TABLE 2 Industry Data Three-Year Medlans (2015-2017) by Credit-Rating Category Aaa Aa A вь Bb в 1.0 63.5 8.0 11.0 ЕВГТЛnterest exрепе Long-term debt/Total capitalization 9.5 4.5 3.0 2.0 13.0 16.5 29.5 39.0 45.5 Funds from operations/Total debt 83.0 74.0 45.5 31.5 18.5 Operating income/Sales 21.5 16.0 15.0 12.0 11.0 9.0
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