Kerr McGee Corporation, a global energy and chemical company, includes the following information in a footnote describing the long term debt reported in its 1997 financial statements:
|
Long term debt (Partial) |
(Dollars in millions) |
|
7.125% Debentures due October 15, 2027 (7.01% effective rate) |
$ 150 |
|
7% Debentures due November 1, 2011, net of unamortized debt discount of |
|
|
$108 million in 1997 and $111 million in 1996 (14.25% effective rate) |
142 |
|
8 1/2% Sinking fund debentures due June 1, 2006 |
22 |
|
Notes payable |
|
|
6.625% Notes due October 15, 2007 (6.54% effective rate) |
150 |
|
Other |
90 |
Required
a. Why do the interest rates differ among the various debt issues reported by Kerr McGee?
b. Why is the information concerning the due dates of Kerr McGee’s debt useful to the analyst?
c. Note that the coupon rates and effective interest rates differ for several of Kerr McGee’s debt issues. Based on the information provided above, which of these issues was sold at a discount? Which was sold at a premium?
d. Assume that the market rate of interest on similar debt is 10 percent at the balance sheet date (December 31, 1997). If so, would the market values of the first two issues listed above be greater or less than their book values? Explain.
e. Based on your answer to part d, if Kerr McGee’s management wished to report a gain on early debt retirement, which of the issues would be retired?