Question

Assigning a Long-Term Debt Rating Using Financial Ratios

Refer to the information below from Nordstrom Inc.’s 2016 financial statements. Use the information to answer the requirements ($ millions).

Sales					$15,093
Depreciation expense					578
Tax expense					394
Interest expense, gross					171
Earnings from continuing operations (Net income)					685
EBITA					1,256
Cash					613
Average total assets					9,470
Total debt					2,908
Noncurrent deferred tax liabilities					391
Noncontrolling interest					0
Equity					871
Dividends paid					1,185
Cash from operating activities					2,451

a. Compute the following seven Moody’s metrics for Nordstrom. See Appendix 4A for definitions.

Round answers to one decimal place (example for percentage answers: 0.2345 = 23.5%).

Ratio			2016
EBITA to average assets			Answer%
Operating margin			Answer%
EBITA margin			Answer%
EBITA interest coverage			Answer
Debt to EBITDA			Answer
Debt to book capitalization			Answer%
Retained cash flow to net debt			Answer%

b. Use your computations from part a, along with measures in Exhibit 4.7, to estimate the long-term debt rating for Nordstrom.

Based on the above computations, the rating for Nordstrom's long-term debt would fall in the AnswerAaa - Aa rangeA - Baa rangeBa - B rangeCaa - C range

Answer 1

	Sales	$ 15,093
	Depreciation expense	578
	Tax expense	394
	Interest expense, gross	171
	Earnings from continuing operations (Net income)	685
	EBITA	1,256
	Cash	613
	Average total assets	9,470
	Total debt	2,908
	Noncurrent deferred tax liabilities	391
	Noncontrolling interest	0
	Equity	871
	Dividends paid	1,185
	Cash from operating activities	2,451
a	Ratio	2016	Workings
	EBITA to average assets	13.3%	= 1256/9470
	Operating margin	7.1%	= (685+394)/15093
	EBITA margin	8.3%	= 1256/15093
	EBITA interest coverage	7.35	= 1256/171
	Debt to EBITDA	1.6	= 2908/(1256+578)
	Debt to book capitalization	69.7%	= 2908/(391+2908+871)
	Retained cash flow to net debt	37.7%	= (2451-1185-171)/2908
b	Based on the above computations, the rating for Nordstrom's long-term debt would fall in the A - Baa range