P8-39. Analyzing Debt Terms, Yields, Prices, and Credit Ratings (LO2, 3)
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
Reproduced below is a summary of the market values of the Dell bonds maturing from 2021 to
2040 (from Morningstar, quicktake.morningstar.com).
Name
Due
Amount
Coupon Yield to
Date
$
Price %
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
Required
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?
Why is information relating to a company’s scheduled maturities of debt useful in an analysis of
its financial condition?
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 $11 million in difference between interest expense and
interest paid? Explain.
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? Explain.
d. Dell’s $300 million 5.4% notes traded at 94.8, or 94.8% of par, as of December 2010.
What is the dollar market value of these notes on that date?
How is the difference between this market value and the $300 million face value reflected in
Dell’s financial statements?
What effect would the repurchase of this entire note issue have on Dell’s financial statements?
What does the 94.8 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.
f. Were the senior debentures issued at a premium or a discount?
g. Which debt was paid off during the year ending January 28, 2011?
Which new debt was issued during the year ending January 28, 2011?