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 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.

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TABLE I Alpine Chemical Company 2009 2010 2011 2012 2013 2014 EBITAnterest expense Long-term debUTotal capitalization Funds from operations/Total Operating income/Sales 4.95 44% 54% 13% 3.464.96 28% 84% 13% 34% 93% 13% 4.794.70 34% 56% 14% 34% 51% 12% debt TABLE 2 Industry Data Three-Year Medians (2012-2014) by Credit-Rating Category Bbb Aaa 11.0 13.0 Aa Bb 9.5 16.5 83.074.045.5 16.0 4.5 29.5 EBITAnterest expense Long-term debt/Total capitalization Funds from operations/Total Operating income/Sales 39.0 31.5 12.0 2.0 45.5 18.5 11.0 1.0 63.5 8.0 9.0 debt 21.5 15.0