Taking It to the Net — BTN 10-5
1. Home Depot’s long–term liabilities as of February 2, 2014, follow:
Long-term debt, excluding current installments ………….
$14,691 million
Other long-term liabilities …………………………………………..
2,042 million
Deferred income taxes ……………………………………………….
514 million
2 a. These Home Depot notes offer a 5.875% interest rate. If the interest
Effective Interest Amortization of Bond Premium
Semi-
annual
Period-end
(A)
Cash
Interest
Paid
(B)
Bond
Interest
Expense
(C)
Premium
Amortization
(D)
Unamortized
Premium
(E)
Carrying
Value
1/01/2015
$ 4,100
$ 104,100
6/30/2015
$ 4,500
$ 4,164
$ 336
3,764
103,764
12/31/2015
4,500
4,151
349
3,415
103,415
6/30/2016
4,500
4,137
363
3,052
103,052
12/31/2016
4,500
4,122
378
2,674
102,674
6/30/2017
4,500
4,107
393
2,281
102,281
Since teams generally have 4 or 5 members, the team solution will likely end about
here. The remainder of the table is shown for help in answering part 3.
12/31/2017
4,500
4,091
409
1,872
101,872
6/30/2018
4,500
4,075
425
1,447
101,447
12/31/2018
4,500
4,058
442
1,005
101,005
6/30/2019
4,500
4,040
460
545
100,545
12/31/2019
4,500
3,955*
545
0
100,000
$45,000
$40,900
$4,100
*Discrepancy due to rounding.
The following computations should be articulated by team members as
each line is explained and prepared:
Column (A) Cash Interest Paid = Bonds’ par value ($100,000) x Semiannual
contract rate (4.5%).
Column (B) Bond interest expense = Bonds’ prior period carrying value x
Semiannual market rate (4%).
Column (C) Premium Amortization = difference between cash interest paid and
bond interest expense, or [(A) – (B)].
Column (D) Unamortized Premium = prior period’s unamortized premium less
the current period’s premium amortization, or [(D) – (C)].
Column (E) Bonds’ Carrying Value = Bonds’ par value plus unamortized
Teamwork in Action (Concluded)
Part 3
Without completing the table, team members should be able to project the
final number in the first column and for each of the columns (A), (D), and
(E). Specifically:
(Col. 1) Last interest period date is 12/31/2019 because this is a five-year
bond, issued 1/1/2015, with semiannual interest payments made
on 6/30 and 12/31 of each year.
(Col. A) Interest paid of $4,500 (every interest period has the same amount
of interest paid).
(Col. D) Zero unamortized premium (by the last interest period the
premium must be fully amortized).
(Col. E) Ending carrying value is $100,000 (the carrying value always
equals the par value at the maturity date, after all amortization is
recorded).
Part 4
Entrepreneurial Decision — BTN 10-7
Part 1
The table below reveals how the five alternative interest–bearing notes
would affect this company’s interest expense, net income, equity, and
return on equity (net income/equity):
return with borrowed funds than it is paying in interest, it increases its
return on equity. In the case of this company, it is predicting a return of
16% on its investment, computed as its expected $16,000 additional annual
income before interest divided by its $100,000 investment. This means that
for it to pursue the investment, the interest on the borrowed funds must be
1. Samsung’s current year debt–to-equity ratio (in KRW millions):
2. Samsung’s debt–to–equity ratio decreased slightly from the prior year to
the current year. For the current year, Samsung’s debt–to-equity ratio is