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.

1. Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 2014:
a. EBIT/Interest expense
b. Long-term debt/Total capitalization
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 AlpineChemical.

  • CreatedSeptember 10, 2014
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