Cases
C1. Conceptual Understanding: Bond Issue
Unsecured notes (or debenture bonds) are bonds issued on the general credit of the or-
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C3. Conceptual Understanding: Characteristics of Convertible Debt
There are several good reasons for issuing convertible notes instead of nonconvertible
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such as the debt to equity, or interest coverage ratio, look better than they would if the
company recognized the future lease payments as liabilities. Further, free cash flow is
improved because the company is not making expenditures to purchase the assets it is
leasing.
A capital lease is a long-term lease that cannot be canceled, has a duration that is about
Often these operating leases represent commitments on the part of the company to
make payments for five years or more in the future. Since these commitments for future
payments do not appear on the balance sheet as liabilities, any ratio that includes debt,
C4. Conceptual Understanding: Effect of Long-Term Leases
Operating leases, such as those described for Continental Airlines, do not appear on the
balance sheet. They are treated as operating expenses when the lease payments are
made.
in the news.
$222 million. Underfunding of pension plans has been an issue of some controversy
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+
(dollars in millions)
CVS’s Debt to Equity Ratio:
Total Stockholders’ Equity
C6. Interpreting Financial Reports: Use of Debt Financing
Debt to Equity Ratio = Total Liabilities
$584
$5,746 $584 =
=
$6,330 10.8 times*
*Rounded
Interest Expense
CVS’s Interest Coverage Ratio:
=Interest Coverage Ratio Income Before Income Taxes + Interest Expense
2011
$536
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+
+
Interest Coverage Ratio =
$194
Income Before Income Taxes + Interest Expense
Interest Expense
*Rounded
C6. Interpreting Financial Reports: Use of Debt Financing (Concluded)
(dollars in millions)
Southwest’s Debt to Equity Ratio:
Debt to Equity = Total Liabilities
Total Stockholders’ Equity
$11,191
Southwest’s Interest Coverage Ratio:
2011 $323 $194
2010 $745 $167
$167
$167
Note to Instructor: Answers will vary depending on the company selected by the
students.
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