Long term Debt: Interpreting Financial Statements
Cabot Cove’s annual report contained a note on long term debt. A partial list of the long term debt follows, exclusive of current maturities (dollars in thousands):
|
2000 |
1999 |
|
|
Notes due 2001, 9.875% |
$150,000 |
$150,000 |
|
Notes due 2002 2022, 8.07% |
105,000 |
105,000 |
|
Overseas Private Investment Corp. |
||
|
due 2002, floating rate 6.5% |
15,000 |
— |
|
Industrial revenue bonds, due |
||
|
2001 2014, 9.35% 14% |
5,000 |
6,000 |
Required
a. Comment on why Cabot might have long term debt with such different interest rates and different maturities.
b. Based on current interest rates, which of these liabilities will sell above (or below) par values? Why?
c. Discuss how managers might use an aggressive debt retirement strategy to increase or decrease net income.