Best Buy Co. is a leading international retailer of consumer electronics. Like a
ID: 2421003 • Letter: B
Question
Best Buy Co. is a leading international retailer of consumer electronics. Like any major retail outlet, it owns some of its facilities, but the company also leases its retail stores as well as other property and equipment under various types of leases. I have attached excerpts from Best Buy’s Annual Report for the fiscal year-ending March 1, 2008. Refer to the attached financial reports and footnotes to answer the following questions.
(i) Comment on to what extent Best Buy has been using operating leases (pure rental) versus non-operating leases (such as, capital and financing) that give rise to future obligations? [3]
(ii) Best Buy reports total long term debt of $660 million. The company also reports breakdown of its long term debt into different sub-categories in a footnote. Perform weighted average computation of interest rates on long term debt based on the different sub-categories of long term debt as of fiscal 2008. [5]
(iii) Based on the information given in the attached financial reports and footnotes, what, in your opinion, is the best estimate of discount rate for performing constructive capitalization of operating leases? Show your work. Distribute any lump sum thereafter figure given in the lease footnote evenly over 6 years. [5]
(iv) Use the information in the lease footnote to perform Constructive Capitalization of the operating leases. Assume that the lump sum thereafter figure reported in the schedule in the lease footnote has been evenly distributed over 6 years. Use the discount rate from your answer of part (iii) above for your computation. How much additional assets and obligations constructive capitalization would have brought into the books as of fiscal 2008? [5]
(v) By how much the company’s fiscal 2008 before tax earnings (that is, earnings before tax, minority interest and equity in loss of affiliates) would change due to Constructive Capitalization of operating leases? Note that the lease footnote specifies net rental expenses associated with all operating leases. Also, the company uses straight-line method with no residual value to depreciate all its long term assets, including store facilities, properties and equipments. [4]
Consolidated Balance Sheets $ in millions, except per share and share amounts March 1, 2008 March 3, 2007 Assets Current Assets Cash and cash equivalents Short-term investments Receivables Merchandise inventories Other current assets $1,438 $ 1,205 64 2,588 4,028 9,081 705 2,627 4,708 583 Total current assets 7,342 Property and Equipment Land and buildings Leasehold improvements Fixtures and equipment Property under capital lease 732 1,752 3,057 5,608 2,302 4,904 1,966 3,306 2,938 Less accumulated depreciation Net property and equipment Goodwill Tradenames Equity and Other Investments Other Assets Total Assets 1,088 81 338 605 320 $12,758 $13,570 Liabilities and Shareholders' Equity Current Liabilities Accounts payable Unredeemed gift card liabilities Accrued compensation and related expenses Accrued liabilities Accrued income taxes Short-term debt Current portion of long-term debt $ 4,297$ 3,934 496 332 990 489 373 975 Total current liabilities 6,769 838 627 6,301 Long-Term Liabilities Long-Term Debt Minority Interests Shareholders' Equity 590 Preferred stock, $1.00 par value: Authorized-400,000 shares; Issued and outstanding- none Common stock, $.10 par value: Authorized-1.0 billion shares; Issued and outstanding- 41 410,578,000 and 480,655,000 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income 430 5,507 3,933 Total shareholders' equity Total Liabilities and Shareholders' Equity 4,484 6,201 $12,758 $13,570 See Notes to Consolidated Financial StatementsExplanation / Answer
Answer 1
(i) Comment on to what extent Best Buy has been using operating leases (pure rental) versus non-operating leases (such as, capital and financing) that give rise to future obligations? [3]
Figures $ in millions
Particulars
Capital leases
Financing Leases
Operating leases
Total
Future minimum lease obligations
51
197
6832
7080
% of total lease obligations
0.72
2.78
96.50
100.00
Use of Operating leases versus Non operating leases (%)
3.50
96.50
100.00
Answer 2
(ii) Best Buy reports total long term debt of $660 million. The company also reports breakdown of its long term debt into different sub-categories in a footnote. Perform weighted average computation of interest rates on long term debt based on the different sub-categories of long term debt as of fiscal 2008. [5]
Particulars
Long term debt as on March 1, 2008 ($ milns)
Avg. Interest Rates
Avg time period (years)
Avg time period (years) weight
Weighted Average Interest rate on long term debt
A
B
C
A*C
Convertible subordinated debentures
402
2.25%
14
0.35
0.79%
(Due 2022)
Financing Lease obligations
197
4.75%
8
0.20
0.95%
(3%+6.5%)/2
(From 2009 to 2023 )
(1+15)/2
Capital lease obligations
51
6.95%
10
0.25
1.74%
(5.1%+8.8%)/2
(From 2010 to 2026)
(2+18)/2
Other Debt
10
5.70%
8
0.20
1.14%
(2.6%+8.8%)/2
From 2010 to 2022
(2+14)/2
Total
660
40
1.00
4.62%
Answer : weighted average of interest rates on long term debt considering no of years as weight is 4.62%
Particulars
Long term debt as on March 1, 2008 ($ milns)
Avg. Interest Rates
Interest Cost
A
B
A*B
Convertible subordinated debentures
402
2.25%
9.045
Financing Lease obligations
197
4.75%
9.3575
(3%+6.5%)/2
Capital lease obligations
51
6.95%
3.5445
(5.1%+8.8%)/2
Other Debt
10
5.70%
0.57
(2.6%+8.8%)/2
Total
660
22.517
Weighted average of Interest rate based on yearly Interest cost
3.41%
(22.517/660)*100
Answer : Weighted average Interest rate based on yearly Interest cost only is 3.41%
Figures $ in millions
Particulars
Capital leases
Financing Leases
Operating leases
Total
Future minimum lease obligations
51
197
6832
7080
% of total lease obligations
0.72
2.78
96.50
100.00
Use of Operating leases versus Non operating leases (%)
3.50
96.50
100.00
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