OMM622 WEEK 2 DISCUSSION 2

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):

  Current liabilities $11,782   Long-term debt 15,126   Other liabilities 2,345   Total assets 44,560    

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:

  Future Minimum Lease Payments (in Millions) Operating Leases Capital Leases   2008 $ 239 $  12   2009   187   16   2010   173   16   2011   129   16   2010   123   17   After 2010 2, 843   155   Total future minimum lease payments $3694 (a) $232   Less: Interest (b)   (105)   Present value of minimum capital lease payments  $127 (c)    

(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.