This module begins with a discussion of credit

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set in the "loan" as well as the prevailing market rate of interest. This module begins with a discussion of credit markets-the supply and demand for credit. Then we consider credit risk analysis and explain how operating and nonoperating creditors use financial accounting numbers and other information to make lending decisions. We learn how banks make loans to customers and about common loan terms and conditions. The module also discusses how credit-rating agencies assess companies' credit risk to determine credit ratings and how ratings affect bond prices and cost of debt capital. We use Home Depot as the focus company. Wereproduce its balance sheet in Exhibit 4.1 and its debt footnote in Exhibit 4.2. DEMAND FOR AND SUPPL V OF CREDIT L01 Understand the demand for and supply of credit. To understand the market for credit, we first consider the demand for credit and then the suppl of credit. Demand for Credit Companies demand credit for various operating, investing and financing activities. Operating activities Many companies have cyclical operating cash needs. For example. companies that manufacture inventory have to pay for materials and labor months before they will be able to sell their product and collect revenue. This is also the case for seasonal companies 4-3 .-.oiiiIII
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Module 4 I Credit Risk Analysis and Interpretation 4-4 Home Depot Balance Sheet January 30, 2011 January 31, 2010 Assets and cash equivalents . . ables, net .................... ..................................... •...•..•.• achandise inventories ............................................... •.•.••.•.•...• current assets . -otal current assets ........................ .................................. •.. perty and equipment . receivable . will . assets .... .................................................................. -- assets . ies and Stockholders' Equity Liabilities unts payable. . . ed salaries and related expenses , . taxes payable . ed revenue . e taxes payable . :...nent installments of long-term debt. . accrued expenses . Total current liabilities . -terrn debt, excluding current installments . long-term liabilities ............................... •...• ....................... - ed income taxes . -0 alliabilities . Iders' equity man Stock, par value $0.05; authorized: 10 billion shares; issued: 1.722 billion and 1.716 billion shares; outstanding: 1.623 billion and 1.698 billion shares . _. in capital . =- . ined earnings . mulated other comprehensive income . -'33Sury Stock, at cost, 99 million and 18 million shares otal stockholders' equity. . . . . . . . . . . . . . . . . . . . .. . . otal liabilities and stockholders' equity . $ 545 $ 1,421 1,085 964 10,625 10,188 1,224 1,327 --- --- 13,479 13,900 --- --- 25,060 25,550 139 33 1,187 1,171 260 223 --- --- $40,125 $40,877 $ 4,717 $ 4,863 1,290 1,263 368 362 1,177 1,158 13 108 1,042 1,020 1,515 1,589 --- --- 10,122 10,363 --- --- 8,707 8,662 2,135 2,140 272 319 --- 21,236 21,484 86 86 6,556 6,304 14,995 13,226 445 362 (3,193) (585) 18,889 19,393 --- --- $40,125 $40,877 Debt Footnote for Home Depot S in millions .625% Senior Notes; due August 15, 2010; interest payable semi-annually on February 15 and August 15 ........................................... .... 5.20% Senior Notes; due March 1, 2011; interest payable semi-annually on March 1 and September 1 . 5.25% Senior Notes; due December 16, 2013; interest payable semi-annually on June 16 and December 16 . 5.40% Senior Notes; due March 1, 2016; interest payable semi-annually on March 1 and September 1 . 3.95% Senior Notes; due September 15, 2020; interest payable semi-annually on March 15 and September 15 .
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