Writing Skills Problem

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Writing Skills Problem. At fiscal year-end December 31, 2012, ShopWorld had the follow- ing assets and liabilities on its balance sheet (in  millions):

 

Current liabilities	$9,459
Long-term debt	12,330
Other liabilities	1,180
Total assets	37,411

 

ShopWorld reported the following information on leases in the notes to the financial statements:

Total rent expense was $195 million in 2012, $189 million in 2011, and $188 million in 2010. Most of the long-term leases include options to renew, with terms varying from 1 to 50 years. Certain leases also include options to purchase the property.

 

Future minimum lease payments required under noncancelable lease agreements existing at December 31, 2012, were:

 

 

 

Future Minimum Lease Payments (in millions)

 

Operating Leases

 

Capital Leases

 

 

2013	$224	$    7
2014	201	9
2015	193	9
2016	168	10
2017	142	10
After 2017	3,935	138
Total future minimum lease payments	$4,863	$183
Less: Interest		(70)
Present value of minimum capital lease

payments                                                                                                                      $113

 

 

Required: Your friend, Liz, loves to shop at ShopWorld and is now interested in investing in the company. Tom, another friend of Liz, has told her that ShopWorld’s debt structure is risky, with obligations nearly 74% of total assets. Liz sees that debt on the balance sheet is 61% of total assets and is confused by Tom’s comment. Write an explanation to Liz dis- cussing the debt structure of ShopWorld and why Tom thinks ShopWorld is risky. Be sure to explain clearly to Liz what information appears on financial statements, as well as what information does not appear directly on the financial statements.