Problem - 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.
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Alpine Chemical Company Financial Statements
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Years Ended December 31
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($ in millions)
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2006
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2007
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2008
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2009
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2010
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2010
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Assets
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Cash
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$190
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$55
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$--
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$157
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$249
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$--
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Accounts receivable
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1,637
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2,087
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1,394
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2,143
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3,493
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3,451
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Inventories
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2,021
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945
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1,258
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1,293
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1,322
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1,643
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Other current assets
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17
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27
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55
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393
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33
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171
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Current assets
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3,865
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3,114
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2,707
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3,986
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5,097
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5,265
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Gross fixed assets
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4,650
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5,038
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5,619
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5,757
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6,181
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7,187
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Less: accumulated depreciation
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2,177
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2,543
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2,841
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3,138
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3,465
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3,893
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Net fixed assets
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2,473
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2,495
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2,778
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2,619
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2,716
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3,294
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Total assets
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$6,338
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$5,609
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$5,485
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$6,605
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$7,813
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$8,559
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Liabilities and net worth
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Notes payable
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$525
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$750
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$--
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$1,300
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$1,750
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$1,900
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Accounts payable
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673
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638
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681
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338
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743
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978
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Accrued liabilities
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303
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172
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359
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359
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483
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761
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Current liabilities
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1,501
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1,560
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1,040
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1,997
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2,976
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3,639
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Long-term debt
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1,985
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1,044
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1,401
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1,457
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1,542
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1,491
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Deferred tax credits
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352
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347
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363
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336
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345
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354
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Total liabilities
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3,838
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2,951
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2,804
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3,790
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4,863
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5,484
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Common Stock
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50
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50
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100
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100
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100
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100
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Capital surplus
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100
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100
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-
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-
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-
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-
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Retained earnings
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2,350
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2,508
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2,581
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2,715
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2,850
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2,975
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Net worth
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2,500
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2,658
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2,681
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2,815
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2,950
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3,075
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Total liabilities and net worth
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$6,338
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$5,609
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$5,485
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$6,605
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$7,813
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$8,559
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Income Statement
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($ millions)
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2006
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2007
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2008
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2009
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2010
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2011
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Net sales
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$14,100
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$15,508
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$13,875
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$14,750
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$19,133
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$19,460
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Cost of goods sold
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10,200
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11,220
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9,366
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10,059
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13,400
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13,117
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Gross profit
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3,900
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4,288
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4,509
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4,691
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5,733
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6,343
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Operating expense
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2,065
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2,203
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2,665
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2,685
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3,472
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3,885
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Operating profit
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1,835
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2,085
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1,844
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2,006
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2,261
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2,458
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Interest expense
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275
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465
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275
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319
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376
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318
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Depreciation expense
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475
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477
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479
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478
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495
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511
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Profit before tax
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1,085
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1,143
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1,090
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1,209
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1,390
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1,629
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Income taxes
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193
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115
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265
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145
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192
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150
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Net income
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$892
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$1,028
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$825
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$1,064
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$1,198
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$1,479
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Required - Using the data provided in the accompanying financial statement, calculate the following ratios for Alpine Chemical for 2011:
a) EBIT/Interest Expense
b) Long-term debt Total Capitalization
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.
Briefly explain the significance of each ratio calculated to the assessment of Alpine Chemical's creditworthiness.