Problem

Analysis of long-term debt Assume that Home and Office City, Inc., provided the LO 5, 7, 8...

Analysis of long-term debt Assume that Home and Office City, Inc., provided the LO 5, 7, 8 following comparative data concerning long-term debt in the notes to its 2011 annual report (amounts in millions):

	December	December
	31, 2011	31, 2010
3%% Convertible Subordinated Notes, due October 1, 2012;
converted into shares of common stock of the Company at a
conversion price of $15.3611 per share in October 2010	$__	$1,103
6%% Senior Notes, due September 15, 2015; interest payable
semiannually on March 15 and September 15 beginning
in 2011	500	__
Commercial Paper; weighted average interest rate of 4.8% at
January 1, 2010	__	246
Capital Lease Obligations; payable in varying installments
through January 31, 2038	216	180
Installment Notes Payable; interest imputed at rates between
5.2% and 10.0%; payable in varying installments
through 2029	45	27
Unsecured Bank Loan; floating interest rate averaging 6.05%
in fiscal 2011 and 5.90% in fiscal 2010; payable in
August 2013	15	15
Variable-Rate Industrial Revenue Bonds; secured by letters of
credit or land; interest rates averaging 2.9% during fiscal 2011
and 3.8% during fiscal 2010; payable in varying installments
through 2021	3	9
Total long-term debt	$779	$1,580
Less current installments	29	14
Long-term debt, excluding current installments	$750	$1,566

Required:

a. As indicated, Home and Office City's 3¼% Convertible Subordinated Notes were converted into shares of common stock in October 2010. How many shares of stock were issued in conversion of these notes?

b. Regarding the 6½% Senior Notes, Home and Office City, Inc., also disclosed that “The Company, at its option, may redeem all or any portion of the Senior Notes by notice to the holder. The Senior Notes are redeemable at a redemption price, plus accrued interest, equal to the greater of (1) 100% of the principal amount of the Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to maturity.”

Redeemable fixed-rate notes, such as those described here, are similar to callable term bonds. Thinking of the 61/2% Senior Notes on this basis, would it have been possible for Home and Office City, Inc., to redeem (“call”) these notes for an amount

1. Below face value (at a discount)?

2. Above face value (at a premium)?

3. Equal to face value (at par)?

What circumstances would have been most likely to prompt Home and Office City to redeem these notes?

c. Recall from the discussion of Cash and Cash Equivalents in Chapter 5 that commercial paper is like an IOU issued by a very creditworthy corporation. Home and Office City’s note disclosures concerning commercial paper reveal that “The company has a back-up credit facility with a consortium of banks for up to $800 million. The credit facility contains various restrictive covenants, none of which is expected to materially impact the company’s liquidity or capital resources.” What do you think is meant by this statement?

d. What other information would you have wanted to know about Home and Office City’s “Capital Lease Obligations” when making an assessment of the company’s overall liquidity and leverage?

e. Regarding the “Installment Notes Payable,” what is meant by “interest imputed at rates between 5.2% and 10%”?

f. Why do you suppose that Home and Office City’s “Unsecured Bank Loan” was immaterial in relation to the company’s total long-term debt?

g. Note that the “current installments” due on Home and Office City’s long-term debt were immaterial in amount for both years presented. Based on the data presented in this case, explain why this is likely to change over the next five years.