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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. Alpine Chemical Company Financial Statements Years Ended December 31, ($ in millions) 20X1 20X2 20X3 20X4 20X5 20X6 Assets $ 190 1,637 2,021 $ 157 $ 249 2$ 2,087 Cash 55 Accounts receivable Inventories 1,394 1,258 2,143 1,293 3,493 1,322 3,451 1,643 171 945 Other current assets 17 27 55 393 33 5,097 6,181 3,465 2,716 5,265 7,187 3,893 3,294 Current assets 3,865 4,650 2,177 3,114 5,038 2,543 2,495 2,707 5,619 2,841 2,778 3,986 5,757 3,138 2,619 Gross fixed assets Less: Accumulated depreciation Net fixed assets 2,473 Total assets $6,338 $5,609 $5,485 $6,605 $7,813 $8,559 Liabilities and net worth 525 673 $ 750 Notes payable Accounts payable $1,300 338 $1,900 978 2$ $1,750 743 $ 638 681 303 1,501 1,985 352 761 172 1,560 1,044 Accrued liabilities 359 359 483 1,997 1,457 Current liabilities Long-term debt Deferred tax credits 1,040 1,401 2,976 1,542 3,639 1,491 354 347 363 336 345 3,838 50 2,951 50 2,804 100 4,863 100 5,484 100 Total liabilities 3,790 100 Common stock Capital surplus Retained earnings 100 100 2,350 2,500 2,715 2,815 2,508 2,581 2,850 2,975 3,075 Net worth 2,658 2,681 2,950 Total liabilities and net worth $6,338 $5,609 $5,485 $6,605 $7,813 $8,559 Income statement 20X1 20X2 20X3 20X4 20X5 20X6 $13,875 9,366 4,509 2,665 1,844 275 Net sales $14,100 10,200 3,900 2,065 1,835 $15,508 11,220 Cost of goods sold Gross profit Operating expense Operating income Interest expense 4,288 2,203 2,085 465 $14,750 10,059 4,691 2,685 2,006 $19,133 13,400 5,733 3,472 2,261 376 $19,460 13,117 6,343 3,885 2,458 318 275 319 Depreciation expense Profit before tax 475 477 479 478 495 511 1,085 1,143 1,090 1,209 1,390 1,629 Income taxes 193 115 265 145 192 150 Net income 2$ 892 $ 1,028 825 $ 1,064 $ 1,198 $ 1,479 %24

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. Alpine Chemical Company Financial Statements Years Ended December 31, ($ in millions) 20X1 20X2 20X3 20X4 20X5 20X6 Assets $ 190 1,637 2,021 $ 157 $ 249 2$ 2,087 Cash 55 Accounts receivable Inventories 1,394 1,258 2,143 1,293 3,493 1,322 3,451 1,643 171 945 Other current assets 17 27 55 393 33 5,097 6,181 3,465 2,716 5,265 7,187 3,893 3,294 Current assets 3,865 4,650 2,177 3,114 5,038 2,543 2,495 2,707 5,619 2,841 2,778 3,986 5,757 3,138 2,619 Gross fixed assets Less: Accumulated depreciation Net fixed assets 2,473 Total assets $6,338 $5,609 $5,485 $6,605 $7,813 $8,559 Liabilities and net worth 525 673 $ 750 Notes payable Accounts payable $1,300 338 $1,900 978 2$ $1,750 743 $ 638 681 303 1,501 1,985 352 761 172 1,560 1,044 Accrued liabilities 359 359 483 1,997 1,457 Current liabilities Long-term debt Deferred tax credits 1,040 1,401 2,976 1,542 3,639 1,491 354 347 363 336 345 3,838 50 2,951 50 2,804 100 4,863 100 5,484 100 Total liabilities 3,790 100 Common stock Capital surplus Retained earnings 100 100 2,350 2,500 2,715 2,815 2,508 2,581 2,850 2,975 3,075 Net worth 2,658 2,681 2,950 Total liabilities and net worth $6,338 $5,609 $5,485 $6,605 $7,813 $8,559 Income statement 20X1 20X2 20X3 20X4 20X5 20X6 $13,875 9,366 4,509 2,665 1,844 275 Net sales $14,100 10,200 3,900 2,065 1,835 $15,508 11,220 Cost of goods sold Gross profit Operating expense Operating income Interest expense 4,288 2,203 2,085 465 $14,750 10,059 4,691 2,685 2,006 $19,133 13,400 5,733 3,472 2,261 376 $19,460 13,117 6,343 3,885 2,458 318 275 319 Depreciation expense Profit before tax 475 477 479 478 495 511 1,085 1,143 1,090 1,209 1,390 1,629 Income taxes 193 115 265 145 192 150 Net income 2$ 892 $ 1,028 825 $ 1,064 $ 1,198 $ 1,479 %24

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### Financial Analysis of Alpine Chemical Company #### Balance Sheet Summary (in millions) **Assets** - **Current Assets:** - Cash: Ranges from $0 (20X3, 20X6) to $249 (20X5). - Accounts Receivable: Increases from $1,637 (20X1) to $3,493 (20X5). - Inventories: Peaks at $2,143 (20X2) and $1,643 (20X6). - Other Current Assets: Goes from $17 (20X1) to $393 (20X4). - Total Current Assets increase over time reaching $5,265 (20X6). - **Fixed Assets:** - Gross Fixed Assets: Grows from $4,650 (20X1) to $7,187 (20X6). - Accumulated Depreciation: Increases steadily, reaching $3,893 (20X6). - Net Fixed Assets: Generally increases from $2,473 (20X1) to $3,294 (20X6). - **Total Assets** grow consistently from $6,338 (20X1) to $8,559 (20X6). **Liabilities and Net Worth** - **Current Liabilities:** - Notes Payable: Peaks at $1,750 (20X5). - Accounts Payable: Highest at $978 (20X6). - Accrued Liabilities: Maximum of $761 (20X6). - **Long-term Debt:** Gradually increases to $1,497 (20X6). - **Deferred Tax Credits:** Slight fluctuating increase, reaching $354 (20X6). - **Total Liabilities** rise from $3,838 (20X1) to $5,484 (20X6). - **Equity:** - Common Stock and Capital Surplus remain consistent. - Retained Earnings increase from $2,308 (20X1) to $2,975 (20X6). - **Net Worth** trends upward from $2,500 (20X1) to $3,075 (20X6). - **Total Liabilities and Net Worth** increase from $6,338 (20X1) to $8,559 (20X6). #### Income Statement Overview - **Net Sales:** Rise
Transcribed Image Text:### Financial Analysis of Alpine Chemical Company #### Balance Sheet Summary (in millions) **Assets** - **Current Assets:** - Cash: Ranges from $0 (20X3, 20X6) to $249 (20X5). - Accounts Receivable: Increases from $1,637 (20X1) to $3,493 (20X5). - Inventories: Peaks at $2,143 (20X2) and $1,643 (20X6). - Other Current Assets: Goes from $17 (20X1) to $393 (20X4). - Total Current Assets increase over time reaching $5,265 (20X6). - **Fixed Assets:** - Gross Fixed Assets: Grows from $4,650 (20X1) to $7,187 (20X6). - Accumulated Depreciation: Increases steadily, reaching $3,893 (20X6). - Net Fixed Assets: Generally increases from $2,473 (20X1) to $3,294 (20X6). - **Total Assets** grow consistently from $6,338 (20X1) to $8,559 (20X6). **Liabilities and Net Worth** - **Current Liabilities:** - Notes Payable: Peaks at $1,750 (20X5). - Accounts Payable: Highest at $978 (20X6). - Accrued Liabilities: Maximum of $761 (20X6). - **Long-term Debt:** Gradually increases to $1,497 (20X6). - **Deferred Tax Credits:** Slight fluctuating increase, reaching $354 (20X6). - **Total Liabilities** rise from $3,838 (20X1) to $5,484 (20X6). - **Equity:** - Common Stock and Capital Surplus remain consistent. - Retained Earnings increase from $2,308 (20X1) to $2,975 (20X6). - **Net Worth** trends upward from $2,500 (20X1) to $3,075 (20X6). - **Total Liabilities and Net Worth** increase from $6,338 (20X1) to $8,559 (20X6). #### Income Statement Overview - **Net Sales:** Rise
**Required:** **1. Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 20X6:** 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. **3. Insert your answers to requirement 1 into Table 1 that follows. Then from Table 2, select an appropriate credit rating for Alpine Chemical.** --- **Table 1: Alpine Chemical Company** | | 20X1 | 20X2 | 20X3 | 20X4 | 20X5 | 20X6 | |-----------------|------|------|------|------|------|------| | EBIT/Interest expense | 4.95 | 4.36 | 4.96 | 4.79 | 4.70 | ? | | Long-term debt/Total capitalization | 44% | 28% | 34% | 34% | 34% | ? | | Funds from operations/Total debt | 54% | 84% | 93% | 56% | 51% | ? | | Operating income/Sales | 13% | 13% | 13% | 14% | 12% | ? | **Table 2: Industry Data** Three-Year Medians (20X4–20X6) by Credit-Rating Category | | AAA | AA | A | BBB | BB | B | |-------------------------|------|------|------|------|------|------| | EBIT/Interest expense | 11.0 | 9.5 | 4.5 | 3.0 | 2.0 | 1.0 | | Long-term debt/Total capitalization | 13.0 | 16.5 | 29.5 | 39.0 | 45.5 | 63.5 | | Funds from
Transcribed Image Text:**Required:** **1. Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 20X6:** 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. **3. Insert your answers to requirement 1 into Table 1 that follows. Then from Table 2, select an appropriate credit rating for Alpine Chemical.** --- **Table 1: Alpine Chemical Company** | | 20X1 | 20X2 | 20X3 | 20X4 | 20X5 | 20X6 | |-----------------|------|------|------|------|------|------| | EBIT/Interest expense | 4.95 | 4.36 | 4.96 | 4.79 | 4.70 | ? | | Long-term debt/Total capitalization | 44% | 28% | 34% | 34% | 34% | ? | | Funds from operations/Total debt | 54% | 84% | 93% | 56% | 51% | ? | | Operating income/Sales | 13% | 13% | 13% | 14% | 12% | ? | **Table 2: Industry Data** Three-Year Medians (20X4–20X6) by Credit-Rating Category | | AAA | AA | A | BBB | BB | B | |-------------------------|------|------|------|------|------|------| | EBIT/Interest expense | 11.0 | 9.5 | 4.5 | 3.0 | 2.0 | 1.0 | | Long-term debt/Total capitalization | 13.0 | 16.5 | 29.5 | 39.0 | 45.5 | 63.5 | | Funds from
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