Margaret O'Flaherty, a portfolio manager for MCF Investments, is considering investing in Alpine Chemical 7% bonds, which mature in10 years. She asks you to analyze the company to determine the riskiness of the bonds.Alpine Chemical Company Financial StatementsYears Ended December 31,($ in millions)20X120X220X320X420X520X6AssetsCash$ 55$1,6372,021190$2,1431,293157249$1,3941,2583,4931,322Accounts receivable3,4511,6432,087Inventories945Other current assets172755393331715,0976,181Current assets3,1145,0382,5432,4953,9865,7573,1383,8652,7075,6192,8412,7785,2654,6502,1772,473Gross fixed assets7,1873,8933,4652,716Less: Accumulated depreciationNet fixed assets2,6193,294Total assets$6,338$5,609$5,485$6,605$7,813$8,559Liabilities and net worthNotes payableAccounts payable$1,300338$5252$750$1,750$1,900673638681743978Accrued liabilities303172359359483761Current liabilities1,5011,9851,9971,4572,9761,5423,6391,4911,5601,040Long-term debtDeferred tax credits1,0441,401352347363336345354Total liabilities3,8382,9512,8043,7904,8635,484Common stock5050100100100100Capital surplusRetained earnings1001002,3502,5002,5812,6812,9753,0752,5082,7152,8502,950Net worth2,6582,815Total liabilities and net worth$6,338$5,609$5,485$6,605$7,813$8,559Income statement20X120X220X320X420X520X6$14,10010,2003,900$14,75010,0594,691$19,13313,4005,7333,472Net sales$15,508$13,875$19,46013,1176,3433,8852,45811,2204,288Cost of goods soldGross profitOperating expenseOperating incomeInterest expense9,3664,5092,0651,8352,2032,0854652,6651,8442,6852,0062,261275275319376318Depreciation expense475477479478495511Profit before tax1,0851,1431,0901,2091,3901,629Income taxes193115265145192150Net income892$ 1,0282$825$ 1,064$ 1,198$ 1,479 Required:1. Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 20X6:a. EBIT/Interest expenseb. Long-term debt/Total capitalization at December 31c. Funds from operations/Total debtd. Operating income/SalesUse the following conventions: EBIT is earnings before interest and taxes; Total capitalization is interest-bearing long-term debt plusnet worth; Funds from operations means net income plus depreciation expense; and Total debt includes interest-bearing short-termand 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 AlpineChemical.Table 1: Alpine Chemical Company20X120X220X320X420X520X6EBIT/Interest expense4.953.464.964.794.70Long-term debt/Total capitalizationFunds from operations/Total debtOperating income/Sales44%28%34%34%34%54%84%93%56%51%?13%13%13%14%12%?Table 2: Industry DataThree-Year Medians (20X4–20X6) by Credit-Rating CategoryAAAAAABBBBBВEBIT/Interest expense11.09.54.53.02.01.0Long-term debt/Total capitalizationFunds from operations/Total debtOperating income/Sales13.016.529.539.045.563.583.074.045.531.518.58.021.516.015.012.011.09.0Complete this question by entering your answers in the tabs below.Required 1Required 3Using the data provided in the accompanying financial statements, calculate the following ratios for Alpine Chemical for 20X6:a. EBIT/Interest expense (Round your answer to two decimal places.)b. Long-term debt/Total capitalization at December 31 (Round percentage answer to the nearest whole percent.)c. Funds from operations/Total debt (Round percentage answer to the nearest whole percent.)d. Operating income/Sales (Round percentage answer to the nearest whole percent.)Show lessA

EBIT = Net Income + Interest + Taxes Total Capitalization= Long term debt + Net worth Funds…

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

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 15P