Accounting projects

Assignment 11

LONG-TERM LIABILITIES

Name of your Company:

The purpose of this assignment is to understand and evaluate the decisions your company's management has made regarding long-term liabilities.

KEY REFERENCES FOR THIS ASSIGNMENT:

a. Moody's Bond Record, Moody's Investors Service (a monthly service), or

b. Standard and Poor's Bond Guide, Standard & Poor's, Inc. (a monthly service)

COMPLETING THE ASSIGNMENT:

1. Identify the changes in the long-term liability accounts that occurred during the most recent accounting period. Blank spaces have been provided for you to write in additional items that appear in your firm's long-term liability section.

			Net Change
	Amount on Most Recent Balance Sheet	Amount at End of Prior Year	In Dollars	In Percent
Long-term Liabilities:
Long-term debt
Capitalized lease obligations
Deferred income taxes
Pension liability
Other
Total long-term liabilities

2. Based on the information on the previous page and that found in the notes to the financial statements, briefly summarize the significant changes, if any, in the long-term liability accounts during the most recent year.

3. What are the approximate interest rates incurred on your firm's long-term liabilities? Complete the schedule below. Some items (e.g., deferred income taxes) do not incur interest. Some (or most) of this information will be found in the notes to the financial statements.

Long-term Liability Accounts	Approximate Rate of Interest
	%
	%
	%
	%
	%

4. What amount of cash is the firm obligated to pay out in each of the next five years for repayment of long-term debt, capitalized lease obligations, operating leases, and/ or other commitments? (This information usually is contained in the notes to the financial statements and will take careful reading to identify.)

Year	Repayment of Long-Term Debt	Capital Lease Obligations	Operating Leases	Other Commitments
Year 1
Year 2
Year 3
Year 4
Year 5
Totals

Go to the statement of cash flows. Observe the amount of "net cash flow from operations" generated in each of the last three years. To what extent does it appear that the company will be able to pay off the above scheduled obligations each year with cash generated from operations? Might the company need to raise the required cash in some other way? Discuss.

5. Find and read the note (to the financial statements) about your firm's pension plan(s). Then, answer the following questions.

a. Which type(s) of pension plan does your firm have? Check all that apply. The firm may have either type of plan, both, or none.

1) Defined contribution plan

2) Defined benefit plan

3) None

b. What is the relationship between the pension obligations your firm's employees have earned and the assets of your firm's pension plan? Fill in the blanks for the information items (i.) through (vi.) below.

1) Fair value of pension plan assets

2) ii. Less: accumulated benefit obligation (ABO)

3) Excess (deficiency) of plan assets over ABO

Learning Note: The accumulated benefit obligation (ABO) is the present value of all pension benefits that employees have earned to date based on their current wage rates.

4) Fair value of pension plan assets

5) Less: projected benefit obligation (PBO)

6) Excess (deficiency) of plan assets over PBO

Learning Note: The projected benefit obligation (PBO) is the present value of all pension benefits that employees have earned to date based on their expected wage rates at the time they retire.

c. If the company were liquidated today, would there be enough pension plan assets for the firm to meet its obligations to its employees? Explain. (Hint: focus on the ABO.)

d. If you acquired the company and its employees today, are there be enough pension plan assets to cover benefits earned-to-date when the employees retire at their normal retirement dates? Explain. (Hint: focus on the PBO.)

6. Identify the investment characteristics of your firm's long-term debt. Obtain the most recent monthly issue of either Moody's Bond Record or Standard & Poor's Bond Guide. (If you have a choice, Moody's Bond Record is a little easier to use.) Look up your company to determine whether it has any long­ term debt listed. (Companies are listed alphabetically in both publications.) Answer each of the following questions for each issue of long-term debt. (If your firm has more than three issues, select three representative issues for listing here.)

	Long-Term Debt Issue # 1	Long-Term Debt Issue #2	Long-Term Debt Issue #3
a. Type of debt (notes, subordinated notes, senior notes, debentures, etc.)
b. Interest rate
c. Year debt is due
d. Debt rating (indicate which rating source you used):
Moody's
S&P
e. Indicate whether the issue is "investment grade" (rated Baa/ BBB or higher) or "speculative grade" (i.e. “junk bonds"). If your company has no bonds rated by Moody's or S&P, leave the rest of this page blank.
f. Call date of the debt (if any)
g. Call price of the debt (if any)
h. Current market price
i. Recent price range:
Highest Price
Lowest Price
j. Yield to maturity

7. Did your firm disclose any contingencies, sometimes called contingent liabilities, in the notes to the financial statements? Discuss the specific nature of these contingencies and how (or whether) they are expected to affect the firm's financial health.

Learning Note: The following two ratios are computed to provide information about how a company is managing its long-term liabilities. The computational formula and information content of each ratio is explained below.

a. Debt to Total Assets Ratio: Total Liabilities/ Total Assets. This ratio reveals the percentage of assets financed by debt. The use of debt financing is referred to as financial leverage. The higher the degree of financial leverage, the higher the risk that a company will not be able to meet its interest payments and will be forced into bankruptcy.

b. Times interest earned: [net income + (interest expense (1 - tax rate))} + interest expense. This ratio measures the cushion a company has regarding its ability to pay interest charges on its debt. The higher the cushion, the more likely the company is to be able to meet its interest payments.

8. Calculate each of the following ratios for the most recent year. Use the computational formulas shown in the Learning Note at the bottom of the previous page that are reproduced below.

a. Debt to total assets = total liabilities / total assets

b. Times interest earned* = net income + [interest expense (1 - tax rate)] / interest expense

*Many companies report a number on the income statement using the title operating income. This amount is often used in the numerator of this ratio instead of the more complex computation shown above. If your company reports operating income, use it in the numerator of this ratio.

9. Enter your results into the first column of the table below. For perspective, compare your firm's ratios for the most recent year to those of your classmates' firms.

		CLASSMATES' FIRMS
Ratio	Your Firm	Firm 1	Firm 2	Firm 3	Firm 4	Firm 5
Debt to total assets ratio
Times interest earned

10. How do your firm's ratios compare to those of your classmates' firms? Are they high, low, about the same? Is there anything specific about your firm, its industry, or your classmates' firms or industries that might tend to explain the differences between your company's ratios and those of the other firms? Discuss, using the space here and on the next page.

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