1) a. The secure debt of Rite Aid is tied to specific assets. Unsecured debt is money that Rite Aid borrowed from financial institutions and has no collateral tied to it. Rite Aid distinguish between these two types of debt to give a clear pictures to investors, credit rating agencies, and lenders that they will be able to make interest and principal payments on time.
b. A guarantee debt is an assurance if one party defaults; another party will pay the debt. Rite Aid wholly-owned subsidiaries guarantee the debt.
2) Per note 11, Indebtedness and Credit Agreement: Total Debt
Due within the coming FY
Per Balance Sheet:
Current Maturities of LTD
LTD, less current maturities
Lease Financing Obligation, less current maturities
6,370,899 ~Note 11
3) a. Rite Aid did not have to pay the face value to repurchase these notes in the open market, because the note maturity is June 2017, therefore is not fully amortized to the note face value yet.
b. The market rate of interest is higher than the coupon rate and the effective rate of interest. At the open market, the repurchased of these notes resulted in a gain which means that the current market rate exceeds the effective rate of interest at time of issue.
4) Firms use convertible notes to raise money, to offer the bond at a lower coupon rate, to have more of the operating income available for the common stockholder, and to attract investors that may not otherwise be interested. An investor would buy these types of bonds because it gives you the option to convert to stocks. If converted, the firm would reduce a liability and increase equity on the balance sheet for the amount converted.
Rite Aid 2010
Rite Aid 2009
Total Liabilities/Total Assets
Common-size interest expense
Interest expense/Net Sales
Debt to Assets
Total LTD/Total Assets
Long term debt to equity
Total LTD/Total SE
Proportion of long term debt due in one year
LTD due in one year/Total LTD
Times interest earned (interest coverage)
(Pretax income+interest expense)/Interest expense
b. Rite Aid deviate from industry in all ratios. It seems like they increase their LTD liquidity risk.
c. As an analyst, I would be very concern about how Rite Aid would meet its LTD commitments. Also, the company has a stockholder’s deficit which would be very difficult to borrow money in a low rate because of risk of default.
d. Since we have a few ratios calculated for Rite Aid and we can see that the company is very vulnerable. I would also calculate cash flow from operations to total liabilities to see the amount of liquid assets available to pay for its debt. Lastly, I would calculate the Z score.
6) Based on the industry average, I would give Rite Aid B to CCC. The company had two years of consecutive losses, and has a high debt to asset ratio. Also, Rite Aid has a negative ratio for Debt to equity, which means that Rite Aid has more debt than assets and might not be able to meet its obligations in the future.