Debt Terms, Yields, Prices, and Credit Ratings
Reproduced below is the debt footnote from the 2013 10-K report from Dell.
Reproduced below is a summary of the market values as of November 2013 of the Dell bonds maturing from 2021 to 2040 (from Morningstar, quicktake.morningstar.com).
a. What is the amount of long-term debt reported on DellAc€?cs February 1, 2013, balance sheet? What are the scheduled maturities for this indebtedness? Why is information relating to a companyAc€?cs scheduled maturities of the debt useful in an analysis of its financial condition?
b. Dell reported $270 million in interest expense in the notes to its 2103 income statement. In the note to its statement of cash flows, Dell indicates that the cash portion of this expense is $279 million. What could account for the difference between interest expense and interest paid? Explain.
c. DellAc€?cs long-term debt is rated Baa1 by MoodyAc€?cs, BBB+ by S&P, and BBB+ by Fitch. What factors would be important to consider in attempting to quantify the relative riskiness of Dell compared with other borrowers? Explain.
d. DellAc€?cs $300 million 5.4% notes traded at 69.50 or 69.5% of par, as November 2013. What is the market value of these notes on that date? How is the difference between this market value and the $300 million face value reflected in DellAc€?cs financial statements? What effect would the repurchase of this entire note issue have on DellAc€?cs financial statements? What does the 69.50 price tell you about the general trend in interest rates since Dell sold this bond issue? Explain.
e. Examine the yields to maturity of the three bonds in the table above. What relation do we observe between these yields and the maturities of the bonds? Also, explain why this relation applies in general.
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