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	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:

(in millions)	Maturities by Fiscal Year
	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 Dells January 28, 2011, balance sheet? $Answer

What are the scheduled maturities for this indebtedness? Year ($ millions)

2012	Answer
2013	Answer
2014	Answer
2015	Answer
2016	Answer
Thereafter	Answer

Why is information relating to a companys scheduled maturities of debt useful in an analysis of its financial condition?

We are looking to see if all payments are approximately equal. If so, the expected drain on cash flow will be constant.

Excessive payments in any one year can create a cash flow problem, especially if the debt cannot be refinanced.

The information relating to a company's scheduled maturities is not important.

We prefer to see liabilities coming due in the near future if interest rates are expected to decline; but deferred if interest rates are expected to increase.

(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.

(c) Dells long-term debt is rated A2 by Moodys, A2 by S&P, and A by Fitch. What factors would be important to consider in attempting to quantify the relative riskiness of Dell compared with other borrowers?

Credit rating agencies assess companies' default risk by gauging the level of debt in relation to the companies' operating cash flow, profitability ratios, and the ratios for long-term creditworthiness.

Credit rating agencies assess companies' default risk by comparing the target company against companies that have defaulted on their debt.

Credit rating agencies assess companies' default risk by focusing primarily on non-quantitative measures such as the quality of the company's management team.

Credit rating agencies assess companies' default risk by focusing primarily on macroeconomic factors such as the projected level of interest rates.

(d) Dells $300 million 5.4% notes traded at 94.8, or 94.8% of par, as of December 2010. What is the market value of these notes on that date? (round your answer to one decimal place) Answer($ million)

How is the difference between this market value and the $300 million face value reflected in Dells financial statements?

The balance sheet is unaffected, but the income statement reflects increases (decreases) in interest rates as increases (decreases) in interest expense.

Only the statement of cash flows is affected as cash is needed to retire the liabilities when they mature.

The current market value of the notes is reflected in the balance sheet as an increase (decrease) in liabilities if rates have declined (increased).

The current market value of the notes is not reflected in Dell's balance sheet.

What effect would the repurchase of this entire note issue have on Dells 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.

If 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.