400 Analyzing Debt Terms, Yields, Prices, and Credit Ratings Reproduced below is the debt footnote from the 2011 10-K report of Dell Inc. January 28, January 29, Long-Term Debt (in millions) 2011 2010 Notes $400 million issued on June 10, 2009, at 3.375% due June 2012 $ 400 $ 401 $ $600 million issued on April 17, 2008, at 4.70% due April 2013 609 599 $500 million issued on September 7, 2010, at 1.40% due September 2013 499 -- $500 million issued on April 1, 2009, at 5.625% due April 2014 500 500 $700 million issued on September 7, 2010, at 2.30% due September 2015 700 -- $500 million issued on April 17, 2008, at 5.65% due April 2018 499 499 $600 million issued on June 10, 2009, at 5.875% due June 2019 600 600 $400 million issued on April 17, 2008, at 6.50% due April 2038 400 $300 million issued on September 7, 2010, at 5.40% due September 2040 300 Senior Debentures $300 million issued on April 3, 1998 at 7.10% due April 2028 389 394 Other India term loan: entered into on October 15, 2009 at 8.9% due October 2011 24 Structured financing debt $ 250 $ Total long-term debt $ 5,146 $ 3,417 Short-Term Debt Commercial paper 496 Structured financing debt 850 164 Other 1 3 Total short-term debt 851 663 Total debt $ 5,997 $ 4,080 Aggregate future maturities of long-term debt at face value were as follows at January 28, 2011: Maturities by Fiscal Year (in millions) 2012 2013 2014 2015 2016 Thereafter Total Aggregate future maturities of long-term debt outstanding $- $ 595 $ 1,155 $ 500 $ 700 $ 2,100 $ $ 5,050 There is an $86 difference between the total referenced in this table and the $5,146 referenced for long-term debt in the table above. The difference arises because the maturity table reports the face value of the debt $(5,050). The first table above reports the carrying value (net book value) of the debt. Many of the notes are not carried at par. The largest difference is the senior debentures that have a premium of $89 (in millions). Reproduced below is a summary of the market values of the Dell bonds maturing from 2021 to 2040 (from Morningstar, quicktake.morningstar.com). Name Maturity Date Amount $ Price Coupon % Yield to Maturity% Dell 5.4% 9/10/2040 300 94.8 5.4 5.77 Dell 6.5% 4/15/2038 400 111.9 6.5 5.63 Dell 4.625% 4/1/2021 400 104.9 4.625 4.01 (a) What is the amount of long-term debt reported on Dell's January 28, 2011, balance sheet? $ 5.146 X (b) Dell reported $199 million in interest expense in the notes to its 2011 income statement. In the note to its statement of cash flows, Dell indicates that the cash portion of this expense is $188 million. What could account for the difference between interest expense and interest paid? The difference arises from the amortization of any discounts or premiums on the debt. The difference arises because the amount of interest expense is based on prevailing interest rates that change frequently. . The difference arises because the amount of interest paid is based on prevailing interest rates that change frequently.* There is never any difference between interest expense and interest paid. What effect would the repurchase of this entire note issue have on Dell's financial statements? There would be no effect on the financial statements if Dell were to repurchase these notes because the repurchase would be made at book value. Only the balance sheet and statement of cash flows would be affected as they reflect the cash payment and consequent reduction of liabilities.x Dell were to repurchase these notes, the difference would be reported as a gain in the current income statement. Dell is prohibited from repurchasing the notes before maturity and, thus, no financial statements would be affected. What does the 94.8 price tell you about the general trend in interest rates since Dell sold this bond issue? The market price of the debt relates only to investor's expectations about the general condition of the airline industry and is unaffected by the level of interest rates. Because these notes have declined in value subsequent to their issuance, market interest rates must have decreased. Because these notes have declined in value subsequent to their issuance, market interest rates must have increased. The price of the bonds is unrelated to the general level of interest rates, only the rate of interest on Dell's debt. Because that hasn't changed, other causes must be considered. 400 Analyzing Debt Terms, Yields, Prices, and Credit Ratings Reproduced below is the debt footnote from the 2011 10-K report of Dell Inc. January 28, January 29, Long-Term Debt (in millions) 2011 2010 Notes $400 million issued on June 10, 2009, at 3.375% due June 2012 $ 400 $ 401 $ $600 million issued on April 17, 2008, at 4.70% due April 2013 609 599 $500 million issued on September 7, 2010, at 1.40% due September 2013 499 -- $500 million issued on April 1, 2009, at 5.625% due April 2014 500 500 $700 million issued on September 7, 2010, at 2.30% due September 2015 700 -- $500 million issued on April 17, 2008, at 5.65% due April 2018 499 499 $600 million issued on June 10, 2009, at 5.875% due June 2019 600 600 $400 million issued on April 17, 2008, at 6.50% due April 2038 400 $300 million issued on September 7, 2010, at 5.40% due September 2040 300 Senior Debentures $300 million issued on April 3, 1998 at 7.10% due April 2028 389 394 Other India term loan: entered into on October 15, 2009 at 8.9% due October 2011 24 Structured financing debt $ 250 $ Total long-term debt $ 5,146 $ 3,417 Short-Term Debt Commercial paper 496 Structured financing debt 850 164 Other 1 3 Total short-term debt 851 663 Total debt $ 5,997 $ 4,080 Aggregate future maturities of long-term debt at face value were as follows at January 28, 2011: Maturities by Fiscal Year (in millions) 2012 2013 2014 2015 2016 Thereafter Total Aggregate future maturities of long-term debt outstanding $- $ 595 $ 1,155 $ 500 $ 700 $ 2,100 $ $ 5,050 There is an $86 difference between the total referenced in this table and the $5,146 referenced for long-term debt in the table above. The difference arises because the maturity table reports the face value of the debt $(5,050). The first table above reports the carrying value (net book value) of the debt. Many of the notes are not carried at par. The largest difference is the senior debentures that have a premium of $89 (in millions). Reproduced below is a summary of the market values of the Dell bonds maturing from 2021 to 2040 (from Morningstar, quicktake.morningstar.com). Name Maturity Date Amount $ Price Coupon % Yield to Maturity% Dell 5.4% 9/10/2040 300 94.8 5.4 5.77 Dell 6.5% 4/15/2038 400 111.9 6.5 5.63 Dell 4.625% 4/1/2021 400 104.9 4.625 4.01 (a) What is the amount of long-term debt reported on Dell's January 28, 2011, balance sheet? $ 5.146 X (b) Dell reported $199 million in interest expense in the notes to its 2011 income statement. In the note to its statement of cash flows, Dell indicates that the cash portion of this expense is $188 million. What could account for the difference between interest expense and interest paid? The difference arises from the amortization of any discounts or premiums on the debt. The difference arises because the amount of interest expense is based on prevailing interest rates that change frequently. . The difference arises because the amount of interest paid is based on prevailing interest rates that change frequently.* There is never any difference between interest expense and interest paid. What effect would the repurchase of this entire note issue have on Dell's financial statements? There would be no effect on the financial statements if Dell were to repurchase these notes because the repurchase would be made at book value. Only the balance sheet and statement of cash flows would be affected as they reflect the cash payment and consequent reduction of liabilities.x Dell were to repurchase these notes, the difference would be reported as a gain in the current income statement. Dell is prohibited from repurchasing the notes before maturity and, thus, no financial statements would be affected. What does the 94.8 price tell you about the general trend in interest rates since Dell sold this bond issue? The market price of the debt relates only to investor's expectations about the general condition of the airline industry and is unaffected by the level of interest rates. Because these notes have declined in value subsequent to their issuance, market interest rates must have decreased. Because these notes have declined in value subsequent to their issuance, market interest rates must have increased. The price of the bonds is unrelated to the general level of interest rates, only the rate of interest on Dell's debt. Because that hasn't changed, other causes must be considered