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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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter2: The Domestic And International Financial Marketplace
Section: Chapter Questions
Problem 5P
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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 $ 249 3,493 1,322 Cash $ 157 2$ 1,637 2,021 190 $ 2,087 2$ 1,394 1,258 $ 3,451 1,643 55 2,143 1,293 Accounts receivable Inventories 945 Other current assets 17 27 55 393 33 171 3,986 5,757 3,865 4,650 2,177 2,473 3,114 5,038 Current asssets 2,707 5,619 2,841 5,265 7,187 3,893 5,097 Gross fixed assets 6,181 2,543 2,495 3,138 2,619 3,465 2,716 Less: Accumulated depreciation Net fixed assets 2,778 3,294 Total assets $6,338 $5,609 $5,485 $6,605 $7,813 $8,559 Liabilities and net worth Notes payable Accounts payable $1,300 338 $ 525 $ 750 $ $1,750 $1,900 673 638 681 743 978 Accrued liabilities 303 172 359 359 483 761 3,639 1,491 Current liabilities 1,501 1,985 1,560 1,044 1,040 1,401 1,997 1,457 336 2,976 Long-term debt 1,542 Deferred tax credits 352 347 363 345 354 Total liabilities 3,838 2,951 2,804 3,790 4,863 5,484 Common stock 50 50 100 100 100 100 Capital surplus Retained earnings 100 100 2,350 2,500 2,508 2,581 2,715 2,850 2,950 2,975 3,075 Net worth 2,658 2,681 2,815 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 $14,100 10,200 3,900 $15,508 11,220 4,288 $13,875 9,366 4,509 2,665 1,844 $14,750 10,059 4,691 2,685 2,006 $19,133 13,400 5,733 3,472 $19,460 13,117 6,343 Net sales Cost of goods sold Gross profit Operating expense Operating income Interest expense 2,065 1,835 2,203 2,085 3,885 2,458 2,261 376 275 465 275 319 318 Depreciation expense 475 477 479 478 495 511 Profit before tax 1,085 1,143 1,090 1,209 1,390 1,629 Income taxes 193 115 265 145 192 150 Net income $ 892 $ 1,028 $ 825 $ 1,064 $ 1,198 $ 1,479
Transcribed Image Text: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 $ 249 3,493 1,322 Cash $ 157 2$ 1,637 2,021 190 $ 2,087 2$ 1,394 1,258 $ 3,451 1,643 55 2,143 1,293 Accounts receivable Inventories 945 Other current assets 17 27 55 393 33 171 3,986 5,757 3,865 4,650 2,177 2,473 3,114 5,038 Current asssets 2,707 5,619 2,841 5,265 7,187 3,893 5,097 Gross fixed assets 6,181 2,543 2,495 3,138 2,619 3,465 2,716 Less: Accumulated depreciation Net fixed assets 2,778 3,294 Total assets $6,338 $5,609 $5,485 $6,605 $7,813 $8,559 Liabilities and net worth Notes payable Accounts payable $1,300 338 $ 525 $ 750 $ $1,750 $1,900 673 638 681 743 978 Accrued liabilities 303 172 359 359 483 761 3,639 1,491 Current liabilities 1,501 1,985 1,560 1,044 1,040 1,401 1,997 1,457 336 2,976 Long-term debt 1,542 Deferred tax credits 352 347 363 345 354 Total liabilities 3,838 2,951 2,804 3,790 4,863 5,484 Common stock 50 50 100 100 100 100 Capital surplus Retained earnings 100 100 2,350 2,500 2,508 2,581 2,715 2,850 2,950 2,975 3,075 Net worth 2,658 2,681 2,815 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 $14,100 10,200 3,900 $15,508 11,220 4,288 $13,875 9,366 4,509 2,665 1,844 $14,750 10,059 4,691 2,685 2,006 $19,133 13,400 5,733 3,472 $19,460 13,117 6,343 Net sales Cost of goods sold Gross profit Operating expense Operating income Interest expense 2,065 1,835 2,203 2,085 3,885 2,458 2,261 376 275 465 275 319 318 Depreciation expense 475 477 479 478 495 511 Profit before tax 1,085 1,143 1,090 1,209 1,390 1,629 Income taxes 193 115 265 145 192 150 Net income $ 892 $ 1,028 $ 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 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 3.46 4.96 4.79 4.70 ? Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 44% 28% 34% 34% 34% ? 54% 84% 93% 56% 51% ? 13% 13% 13% 14% 12% Table 2: Industry Data Three-Year Medians (20X4–20X6) by Credit-Rating Category AAA AA A BBB ВВ В EBIT/Interest expense 11.0 9.5 4.5 3.0 2.0 1.0 Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 13.0 16.5 29.5 39.0 45.5 63.5 83.0 74.0 45.5 31.5 18.5 8.0 21.5 16.0 15.0 12.0 11.0 9.0 Complete this question by entering your answers in the tabs below. Required 1 Required 3 Using 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 less A
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 3.46 4.96 4.79 4.70 ? Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 44% 28% 34% 34% 34% ? 54% 84% 93% 56% 51% ? 13% 13% 13% 14% 12% Table 2: Industry Data Three-Year Medians (20X4–20X6) by Credit-Rating Category AAA AA A BBB ВВ В EBIT/Interest expense 11.0 9.5 4.5 3.0 2.0 1.0 Long-term debt/Total capitalization Funds from operations/Total debt Operating income/Sales 13.0 16.5 29.5 39.0 45.5 63.5 83.0 74.0 45.5 31.5 18.5 8.0 21.5 16.0 15.0 12.0 11.0 9.0 Complete this question by entering your answers in the tabs below. Required 1 Required 3 Using 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 less A
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