CVS discloses its required principal debt repayments due during each of the next five years and thereafter. In millions 2016 2017... .. 2018... 2019...... 2020 Thereafter Total ...... $ 1,197 1,113 3,521 1,266 3,224 17,373 $27,694 CVS also discloses the following information. Interest expense, net-Interest expense, net of capitalized interest, was $859 million, $615 million and $517 million, and interest income was $21 million, $15 million and $8 million in 2015, 2014 and 2013, respectively. Capitalized interest totaled $12 million, $19 million and $25 million in 2015, 2014 and 2013, respectively. Interest paid totaled $629 million, $647 million, and $534 million in 2015, 2014, and 2013 respectively. The price of the 6.125% senior note due 2039 as of May 2016 follows (from Yahoo! Finance). Maturity Date Issuer Security Type Coupon 6.125 Current Current Price Yield 126.13 4.856 Fitch Rating BBB Callable No 2039 CVS Health (NYSE: CVS) Corporate Debentures Required a. What is the average coupon rate (interest paid) on the long-term debt? (Hint: Use the interest expense disclosures.) b. Does your computation of the coupon rate in part a seem reasonable given the footnote disclosure relating to specific bond issues? Explain. c. What is the average effective rate interest expense) on the long-term debt? Explain how the amount of interest paid can differ from the amount of interest expense recorded in the income statement. d. On its 2015 balance sheet, CVS reports current maturities of long-term debt of $1,197 million as part of short-term debt. Why is this amount reported that way? Is this amount important to our analysis of CVS? Explain. e. The $1,500 million 6.125% senior note due in 2039 is priced at 126.13 (126.13% of face value, or $1,891.95 million) as of 2016, resulting in a current yield of 4.856%. Assuming that the credit rating of CVS has not changed, what does the pricing of this 6.125% coupon bond imply about interest rate changes since CVS issued the bond? P7-49. Interpreting Debt Footnotes on Interest Rates and Interest Expense CVS Health Corporation discloses the following as part of its long-term debt footnote in its 2015 10-K. L04 CVS HEALTI CORPORATIC (CVS) BORROWINGS AND CREDIT AGREEMENTS The following table is a summary of the Company's borrowings as of December 31: In millions 2015 $ - 2014 $ 685 550 750 421 1,080 750 421 1,080 2,250 1,250 850 394 2,750 1,250 850 394 450 550 1,250 1,500 450 550 1,250 400 Commercial paper ............. 3.25% senior notes due 2015 .... 1.2% senior notes due 2016. 6.125% senior notes due 2016 ... 5.75% senior notes due 2017 .. 1.9% senior notes due 2018... 2.25% senior notes due 2018 .... 2.25% senior notes due 2019 6.6% senior notes due 2019. 2.8% senior notes due 2020. 4.75% senior notes due 2020 .... 4.125% senior notes due 2021 ... 2.75% senior notes due 2022 .... 3.5% senior notes due 2022 4.75% senior notes due 2022 .... 4% senior notes due 2023 3.375% senior notes due 2024 ... 5% senior notes due 2024..... 3.875% senior notes due 2025 .. 6.25% senior notes due 2027 ... 3.25% senior exchange debentures due 2035 4.875% senior notes due 2035 6.125% senior notes due 2039 .. 5.75% senior notes due 2041 ..... 5.3% senior notes due 2043 .... 5.125% senior notes due 2045 .... Capital lease obligations .. Other............... Total debt principal. Debt premiums....................... Debt discounts and deferred financing costs ....... 1,250 650 1,250 650 300 3,000 453 5 2,000 734 493 750 3,500 644 20 734 493 750 391 41 27,694 12,992 39 (102) (269) 27,464 12,890 Less: Short-term debt (commercial paper) ....... Current portion of long-term debt ....... Long-term debt ....... (1,197) $26,267 (685) (575) $11,630
