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.
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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:### Analysis of Alpine Chemical Company Financial Statements
Margaret O’Flaherty, a portfolio manager for MCF Investments, is evaluating the potential investment in Alpine Chemical 7% bonds, which mature in 10 years. The following is a detailed transcription and assessment of Alpine Chemical's financial statements to determine the risk level of the bonds.
#### Balance Sheet Summary (in millions)
**Assets**
- **Current Assets**:
- Cash: Declines from $190 in 20X1 to $0 in 20X6.
- Accounts Receivable: Shows variation, rising to $3,451 in 20X6.
- Inventories: Starts at $2,021, with a generally decreasing trend to $1,643 in 20X6.
- Other Current Assets: Increases from $17 to $171 by 20X6.
- **Fixed Assets**:
- Gross Fixed Assets: Growth from $4,650 to $7,187 over the period.
- Accumulated Depreciation: Increases, reaching $3,893 in 20X6.
- Net Fixed Assets: A stable increase to $3,294 by 20X6.
**Total Assets**: The total grows from $6,338 to $8,559.
**Liabilities and Net Worth**
- **Liabilities**:
- Notes Payable: Increases significantly to $1,900 in 20X6.
- Accounts Payable: Peaking at $978 in 20X6.
- Accrued Liabilities: Growth to $761 in 20X6.
- Current Liabilities: Expands noticeably from $1,501 to $3,639 by 20X6.
- Long-term Debt: Notably reduced to $1,491 by 20X6.
- Deferred Tax Credits: Increase to $354.
- **Net Worth**:
- Total Liabilities: Rise from $3,838 to $5,484.
- Common Stock remains constant at $50.
- Capital Surplus unchanged at $100.
- Retained Earnings: A steady increment to $2,975.
- Total Net Worth: Grows from $2,500 to $3,075.
**Total Liabilities and Net Worth**: Shows an overall growth aligning with total assets.
#### Income Statement Summary (in millions)
- **Net Sales**:
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.
2. 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 | 3.46 | 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 operations/Total debt
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