Question

Hello,

I am not sure how to find the fair value of fixed-rate and variable-rate debt. Please help, thank you!

h. Refer to Note 20, Financial Instruments. i. What is the fair-value of Rite Aid's fixed-rate debt at February 28, 2004? Why does it differ from the carrying amount? What is the fair-value of the variable-rate debt at February 28, 2004? Why does it not differ from its carrying amount? Why would financial statement users want to know the fair-value of Rite Aid's debt? 20. Financial Instruments The carrying amounts and fair values of financial instruments at February 28, 2004 and March 1, 2003 are listed as follows: 2004 2003 Carrying Fair Carrying Fair Amount Value Amount Value Variable rate indebtedness. .......... $1,150,000 $1,150,000 $1,372,500 $1,372,500 Fixed rate indebtedness.... .. $2,558,497 $2,640,995 $2,313,942 $2,027,603 Cash, trade receivables and trade payables are carried at market value, which approximates their fair values due to the short-term maturity of these instruments. The following methods and assumptions were used in estimating fair value disclosures for financial instruments: LIBOR-based borrowings under credit facilities: The carrying amounts for LIBOR-based borrowings under the credit facilities, term loans and term notes approximate their fair values due to the short-term nature of the obligations and the variable interest rates. Long-term indebtedness: The fair values of long-term indebtedness is estimated based on the quoted market prices of the financial instruments. If quoted market prices were not available, the Company estimated the fair value based on the quoted market price of a financial instrument with similar characteristics.

Answer 1

i) The fair value of Rite Aid’s fixed rate debt at February 28, 2004 is $2640995. The is different from the carrying amount because the carrying amount is based on the historical credit terms which does not based on current LIBOR and the current variable interest rates. The fair value is based on current quoted market prices of the loan instruments.

ii) The fair value of the variable rate debt at February 28, 2004 is same as carrying amount ie. $1150000 because the variable rate debt are quoted at current market LIBOR and due to short term replacement carries current variable loan terms and rate of interest.

iii) The financial statement users wants to know the fair value of Rite Aid’s debt because the actual value of the debt have to be evaluated against the assets which are carried at market value. So, the actual value of the debt could be the current fair value of debt instrument at current market prices LIBOR based under the current prevailing loan terms.

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