Question:
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.
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Transcribed Image Text:
Alplne Chemical Company Flnancial Statements Years Ended December 31, ($ in millions) Assets Cash Accounts receivable Inventories Other current assets 2012 2013 2014 2015 2016 2017 $ 190 S 55 S 0 157 $249 0 1,637 2,087 394 2,43 3,493 3,451 945 1,2581,293 1,3221,64:3 2,021 17 27 393 Current assets Gross fixed assets 3,865 3.1142,7073,986 5,097 5,265 4,650 5,0385,619 5,757 6,18 7,187 Less: Accumulated depreciation 2,177 2,5432,8413.1383,465 3,893 2,4732,495 2,778 2,619 2,7163,294 6,338 5,609 5,485 6,605 $ 7,813 8,559 Net fixed assets Total assets Liabilities and net worth Notes payable Accounts payable Accrued liabilities $ 525 673 303 1,900 978 61 1,501 1,560 0407 29763,639 1,985 044 ,40 ,457 ,542 1,491 354 3,8382,952,8043.790 4,863 5,484 100 $750 638 172 681 359 $0 1,300 1.750 338 359 743 483 Current liabilities Long-term debt Deferred tax credits 352 347 363 330 34.5 Total iabilities Common stock Capital surplus Retained earnings 100 100 50 100 50 100 100 2,350 2,5082,582,715 2,850 2,975 2,500 2,6582,681 2,815 2,950 3,075 6,338宰5.fdyo宰5A8:і $6,6Ari $./,813 $8,599 Net worth l'uial liabilities alki ict worth Income statement Net sales Cost of goods sold 2012 2013 2015 2016 2017 $14,100 $15,508 $13,875 $14,750 $19,133 $19,460 10,200 220 9,366 10,059 13,400 3,117 3,9004,288 4,509 4,69 5.733 6,343 2,065 2,203 1,8352,0858442.006 2,261 2,458 1 Operating expense 2,665 2,685 3,472 Operating income Interest expense Depreciation expense 275 475 465 477 319 478 275 376 9 2 Profit before tax Income taxes 1,08543 1,0901,209 ,390 ,629 150 $ 892 1,028 825 $ 1,064 1,198 1,479 193 192 2 145 TABLE 1 Alplne Chemical Company 2012 2013 2014 2015 2016 2017 EBIT/Interest expense Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 4.95 44% 54% 13% 3.464.96 34% 93% 13% 28% 84% 13% 4.94.70 34% 51% 12% 34% 56% 14% TABLE 2 Industry Data Three-Year Medlans (2015-2017) by Credit-Rating Category Aa Bbb Bb 4.5 16.5 29.539.0 83.0 74.045.5 31.5 18.5 21.5 16.0 15.0 12.0 11.0 EBIT/Interest expense Long-term debt/Total capitalization Funds fro 11.0 13.0 9.5 3.0 2.0 m operations/Total debt ing income/Sales 45.5 63.5 8.0 9.0