Your friend, Liz, loves to shop at Target and is now interested in investing in
ID: 2715951 • Letter: Y
Question
Your friend, Liz, loves to shop at Target and is now interested in investing in the company. Tom, another friend, has told her that Target’s debt structure is risky with obligations of nearly 74% of total assets. Liz sees that debt on the balance sheet is 65% of total assets and is confused by Tom’s comment. Write an explanation to Liz discussing the debt structure of Target and why Tom thinks Target is risky. Be sure to explain clearly what information appears on financial statements, as well as what information does not appear directly on the financial statements. Use the information below in your discussion.
At fiscal year-end February 2, 2008, Target Corporation had the following assets and liabilities on its balance sheet (in millions):
Target reported the following information on leases in the notes to the financial statements:
Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005. Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.
Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:
a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.
Explanation / Answer
The following is the currect Debt to total Assets ratio visible from the reading of financial statements.
In future, there could arise some more liabilities to the company which is mentione din the notes regarding the lease . Till 2010 there are both operating and finance lease commitments. The amount of $1721 million as an option to extend lease terms which are reasonably assured to be exercised. This means that there will be a commitment of $1721 million in future for extending the lease. Moreover, the lease payment for stores to be opened in 2008 also poses a further commmitment from the company. The additional commitments in addition to existing debt are as follows
The possibe future financil commitments for te company in the form of lease payments adds up to the total liabilities. Even if purchase option is exercised, the payment to be made would b PV of lease payments which adds up to almost the sme value of lease payments. Here, the intention of the company seems to be to renew the lease after 2010. So obviously the lease cost would go up which requires finance and adds up to the liability.
$ Current Liabilities 11782.00 Long term liabilities 15126.00 Other liabilities 2345.00 Total Debts 29253.00 Total Assets 44560.00 Debt to Total Assest ratio 66%Related Questions
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