Page 50 - Demo samer flip book

Investopedia.com – the resource for investing and personal finance education.
Fixed-rate debt is typically presented separately from variable-rate debt. In the prior year (2002), less than 20% of the company's long-term debt was held in variable- rate bonds. In the current year, Mandalay carried almost $1.5 billion of variable-rate debt ($995 million of variable-rate long-term debt and $500 million of a "pay floating" interest rate swap) out of $3.5 billion in total (leaving $2 billion in fixed-rate debt).
Don't be confused by the interest rate swap: it simply means that the company has a fixed-rate bond and "swaps" it for a variable-rate bond with a third party by means of an agreement. The term 'pay floating' means the company ends up paying a variable rate; a 'pay fixed interest rate' swap is one in which the company trades a variable-rate bond for a fixed-rate bond.
Therefore, in 2003, the proportion of Mandalay's debt that was exposed to interest rate hikes increased from 18% to more than 40%.
Operating Versus Capital Lease
It is important to be aware of operating lease agreements because economically they are long-term liabilities. Whereas capital leases create liabilities on the balance sheet, operating leases are a type of "off-balance sheet financing." Many companies tweak their lease terms precisely to make these terms meet the definition of an operating lease so that leases can be kept off the balance sheet (improving certain ratios like long term debt-to-total capital).
Most analysts consider operating leases as debt, and therefore manually add operating leases back onto the balance sheet. Pier 1 Imports is an operator of retail furniture stores. Here is the long-term liability section of its balance sheet:
This tutorial can be found at: http://www.investopedia.com/university/financialstatements/ (Page 50 of 66)
Copyright © 2004, Investopedia.com - All rights reserved.