Question

P7-47. Interpreting Debt Footnotes on Interest Rates and Interest Expense. Boston Scientific discloses the following as part of its long-term debt footnote in its December 31, 2018 10-K. Borrowings and Credits Agreements As of December 31, In millions, except interest rates Issuance Date Maturity Date 2018 2017 Semi-annual coupon rate January 2020 Note ............. Dec. 2009 Jan. 2020 $850 $850 6.000% May 2020 Notes May. 2015 May. 2020 $600 $600 2.850% May 2020 Notes May. 2015 May. 2022 $500 $500 3.375% October 2023 Notes Aug. 2013 Oct. 2023 $450 $450 4.125% May 2025 Notes May. 2015 May. 2025 $750 $750 3.850% March 2028 Noes Feb. 2018 March. 2026 $1,000 $- 4.000% November 2035 Notes(1) Nov. 2005 Nov. 2035 $350 $350 7.000% January 2040 Notes Dec. 2009 Jan. 2040 $300 $300 7.375% Unamortized debt insurance discount and deferred finance cost 2020-2040 $(29) $(24) Unamortized gain on fair value hedge 2020-2025 $26 $38 Capital lease obligation Various $6 $1 Long term debt $4,803 $3,815 (1) Corporate credit rating improvements may result in a decrease in the adjusted interest rate on our November 2035 Notes to extent that our lowest credit rating is above BBB- OR Baa3. The interest rates on our November 2035 notes will be permanently re-instated to the issuance rate if the lowest credit ratings assigned to these senior notes is either A- or A3 or higher. Boston Scientific discloses its required principal debt repayments due during each of the next five years (In millions) 2019 $2,248 2020 $1,540 2021 $- 2022 $500 2023 $450 Thereafter $2,400 Boston Scientific also discloses the following information. Interest Expense The following table provides a summary of our interest expense and average borrowing rate: Year Ended December 31 (in millions) 2018 2017 2016 Interest expense $(241) $(229) $(233) Weighted average borrowing rate 3.6% 3.8% 4.0% Cash paid for interest $(262.00) $(235.00) $(233.00) The price of the Boston Scientific's bonds in February 2019 follows. Maturity date Coupon Current Price Current Yield Moody's Rating(02/21/2019) 2028 4.00% 109.35 $2.80 Baa2 2023 4.13% 101.57 2.41% Baa2 REQUIRED a. What amount of Boston Scientific's long-term debt is due in 2019? b. What is the total amount of Boston Scientific's long-term debt at December 31, 2018, including the current maturities? c. The company's balance sheet reports short term debt including current liabilities of $2,253 million and $1,801 millinon in 2018 and 2017, respectively. Compute the average effective interest rate on the company's total debt for fiscal 2018. Compare this to the average interest rate the company reports. d. Explain how the amount of cash paid for interest can differ from the amount of interest expense recorded in the income statement. e. The 1,000 million 4.00% note due in 2028 is priced at 109.35 (109.35% of face value, or or $1093.50 million) as of early 2019, resulting in a current yield of 2.8%. Adssuming that the company's credit rating has not changed since the bond was issued, what does the pricing of thie 4.00% bond imply about interest rate changes since Boston Scientific issued the bond? f. Compare the bonds that mature in 2023 and 2028. Explain why the bond with the higher coupon rate (4.125%) has the lower yield (2.41%).

Answer 1

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