Analyzing Debt Terms, Ylelds, Prices, and Credit Ratings Reproduced below is the debt footnote from the 2011 10-K report of Dell Inc. January 28, January 29, 2010 Long-Term Debt (in millions) 2011 Notes S 401 $ 400 $400 million isued on June 10. 2009, at 3.375% due June 2012 599 S600 million issued on April 17, 2008, at 4.70% due April 2013 609 499 $500 million issued on September 7. 2010, at 1.406 due September 2013 500 500 $500 million issued on April 1. 2009, at 5.625% due April 2014 S700 million issued on September 7, 2010, at 2.30% due September 2015 700 499 499 $500 million isued on April 17, 2008, at 5.65% due April 2018 S600 million issued on June 10. 2009, at 5.875% due June 2019 600 600 ces 400 400 $400 million isued on April 17, 2008, at 6.50% due April 2038 300 $300 million isued on September 7, 2010, at 5,40% due September 2040 Senior Debentures 394 389 $300 million isued on April 3, 1998 at 7.10% due April 2028 Other 24 India term loan: entered into on October 15, 2009 at 8.9% due October 2011 $ 250 S- Structured financing debt Total long-term debt $ 3,417 $5.146 Short-Term Debt 496 Commercial paper 850 164 Structured financing debt 11 Other 851 663 Total short-term debt $ 4,080 $5.997 Total debt 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 %24 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 $89 (in millions). Reproduced below is a summary of the market values of the Dell bonds maturing from 2021 to 2040 (from Morningstar, quicktake.morningstar.com). Maturity Date Amount S Price Coupon % Yield to Maturity% Name Dell 5.4% 9/10/2040 300 94.8 5.4 5.77 400 111.9 Dell 6.5% 4/15/2038 6.5 5.63 400 104.9 Dell 4.625% 4.625 4.01 4/1/2021 (a) What is the amount of long-term debt reported on Dell's January 28, 2011, balance sheet? (a) What is the amount of long-term debt reported on Dell's January 28, 2011, balance sheet? What are the scheduled maturities for this Indebtedness? Year ($ millions) 2012 2013 2014 24 2015 2016 %24 Thereafter $ Why is information relating to a company's scheduled maturities of debt useful in an analysis of its financial condition? OWe are looking to see if all payments are approximately equal. If so, the expected drain on cash flow will be constant. OExcessive payments in any one year can create a cash flow problem, especially if the debt cannot be refinanced. OThe information relating to a company's scheduled maturities is not important. OWe 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? OThe difference arises from the amortization of any discounts or premiums on the debt. OThe difference arises because the amount of interest expense is based on prevailing interest rates that change frequently. OThe difference arises because the amount of interest paid is based on prevailing interest rates that change frequently. OThere is never any difference between interest expense and interest paid. (C) Dell's long-term debt is rated A2 by Moody's, 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? OCredit 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. OCredit rating agencies assess companies' default risk by comparing the target company against companies that have defaulted on their debt. OCredit rating agencies assess companies' default risk by focusing primarily on non-quantitative measures such as the quality of the company's management team. OCredit rating agencies assess companies' default risk by focusing primarily on macroeconomic factors such as the projected level of interest rates. S18aans (d) Dell's $300 million 5.4% notes traded at 94.8, or 94.86 of par, as of December 2010. What is the market value of these notes on that date? (round your answer to one decimal place) (S million) How is the difference between this market value and the $300 million face value reflected in Dell's financial statements? OThe balance sheet is unaffected, but the income statement reflects increases (decreases) in interest rates as increases (decreases) in interest expense. OOnly the statement of cash flows is affected as cash is needed to retire the liabilities when they mature. OThe current market value of the notes is reflected in the balance sheet as an increase (decrease) in liabilitles if rates have declined (increased). OThe 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 Dell's financial statements? OThere would be no effect on the financial statements if Dell were to repurchase these notes because the repurchase would be made at book value. OOnly the balance sheet and statement of cash flows would be affected as they reflect the cash payment and consequent reduction of liabilities. Oif Dell were to repurchase these notes, the difference would be reported as a gain in the current income statement. ODell 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? OThe 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. OBecause these notes have declined in value subsequent to their issuance, market interest rates must have decreased. OBecause these notes have declined in value subsequent to their issuance, market interest rates must have increased. OThe 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. Check Support