2008 2007 Debt (including current portion) $816 $650 Capitalized operating lease obligations (8 times rental expense) $5,902 $5,401 Total debt (incldng capitalized operating lease obligations) $6,718 $6,051 Debt (incldng current portion) $816 $650 Capitalized operating lease obligations (8 times rental expense) $5,902 $5,401 Total shareholders equity $4,484 $6,201 Adjusted capitalization $11,202 $12,252 Debt-to-capitalization ratio 15% 9% Adjusted debt-to-capitalization ratio (incldng capitalized operating lease obligations) 60% 49% In addition, the report says: ... our short-term and long-term debt was comprised primarily of credit facilities and convertible debentures ?. We do not manage the interest rate risk on our debt through the use of derivative instruments. Our credit facilities are not subject to material interest rate risk 3. The credit facilities interest rates may be reset due to fluctuations in a market-based index, such as the federal funds rate, the London Interbank Offered Rate (LIBOR), or the base rate or prime rate of our lenders. A hypothetical 100-basis-point change [increase) in the interest rates of our credit facilities would change (decrease] our annual pre-tax earnings by $2 million. The LIBOR from March to October, 2008, is given below. Month Mar Apr May Jun Jul Aug Sep Oct 3-Month (Debt Expiration) LIBOR Monthly Average in % 2.78 2.79 2.69 2.77 2.79 2.81 3.12 4.01 One of the reasons why increasing interest rates can decrease BestBuy earnings is through inventory financing in place at BestBuy. According to p.70 of the report: "We have inventory financing facilities through which certain suppliers receive payments from a designated finance company on invoices we owe them. Amounts due under the facilities are collateralized by a security interest in certain merchan- dise inventories. The amounts extended [by the finance company] bear interest, if we exceed certain terms, at rates specified in the agreements. We impute interest based on our borrowing rate where there is an average balance outstanding". Using the estimates above and the increase in LIBOR that happened from March to November, compute the drop in pre-tax BestBuy earnings. (Hint: Use the quote above that relates increase rate increases to pre-tax earnings.) b) Another portion of BestBuy costs is due to inventory holding. Most of the inventory is sent from manufacturers to eight BestBuy distribution centers (DC) in the US: Dinuba, California; Findlay, Ohio; Nichols, New York; Ardmore, Oklahoma; Franklin, Indiana; Staunton, Virginia; Dublin, Georgia; Bloom- ington, Minnesota; Whittier, California (ordered from the largest square-footage to the smallest). These DCs then forward the inventory to 923 BestBuy stores in the US. Ardmore, Oklahoma is about 60 miles from the UTD campus and houses the closest BestBuy DC. This DC ships digital cameras to many BestBuy stores, including two that are closest to the UTD campus: Store # 202 (Plano Store) is at 2800 North Central Expressway (Route 75). Store # 256 (Addison Store) is at 4255 Lyndon B. Johnson Freeway (Interstate 635). According to p.17 of the annual report, BestBuy makes more than half of its earnings in the quarter that includes the months of November and December - known as the holiday season in the US. BestBuy is expecting a dismal holiday season and is focusing on cutting costs. To cut operating costs, BestBuy is investigating aggregation of the high-end camera inventory and holding it only at the Addison Store which will then serve the demand that Plano Store is serving now. BestBuy first gathers the holiday season high-end Cannon and Samsung camera sales at Addison and Plano Stores from 2000 to 2007: Holiday season sales in number of cameras 2000 2001 2002 2003 2004 2005 2006 2007 Cannon at Addison Store 46 51 55 47 47 Plano Store Samsung at Addison Store Plano Store 69 78 67 52 These sales data are available in bestbuy-question.xls from the course webpage under BestBuy Sheet on the left panel. Download bestbuy-question.xls and see how safety stock saving of aggregation is com- puted for Cannon assuming that the market trends of last 8 years will continue in 2008. Replicate those computations for Samsung camera to find safety stock saving of aggregation. Compare the correlation of Cannon sales and Samsung sales, comment if the correlations play a role in safety stock saving of aggregation c) Suppose that each Cannon and Samsung camera has an inventory holding cost of $40 per camera per month during the months of November and December. Compute the dollar value of safety stock savings in b). These savings can scaled up easily if Bets Buy implements aggregation throughout the US. If BetBuy aggregates Cannon and Samsung Camera inventories of every two stores in a single store, the savings should be multiplied by the number of stores divided by 2. Compute the US-wide saving of aggregation and compare this saving to drop in the earnings in a). 64 112 41 93 66 86 113 88 101 108 114 42 44 51 62 47 64 38 74 34 81 37 63