ACCT 60010 Professor Karen Nelson

Financial Reporting

Case Assignment
Rite Aid

Rite Aid is the third largest retail drugstore chain in the U.S., selling prescription drugs and a
wide assortment of other merchandise. Selected information from Rite Aids fiscal 2009
financial statements is given below (all dollar amounts are in thousands):

Detailed information for Rite Aids long-term debt for fiscal 2009 and 2008 is as follows:

2009 2008
Secured Debt:
Senior secured revolving credit facility due September 2010 $ 838,000 $ 849,000
Senior secured credit facility term loan due September 2010 145,000 145,000
Senior secured credit facility term loan due June 2014 1,096,713 1,105,000
Senior secured credit facility term loan due June 2014 317,576
7.5% senior secured notes due January 2015 200,000
10.375% senior secured notes due July 2016 ($470,000 face value) 428,989
7.5% senior secured notes due March 2017 500,000 500,000
Other secured 4,194 2,740

(Note that this is only a partial listing of Rite Aids indebtedness for these years.)

Selected financial data for fiscal 2009 and 2008 are as follows:

2009 2008
Summary of Operations:
Sales revenue $26,289,268 $24,326,846
Costs and expense:
Cost of goods sold 19,253,616 17,689,272
Selling, general and administrative expenses 6,985,367 6,366,137
Interest expense 477,627 449,596
Net (loss) income (2,915,420) (1,078,990)

Year-End Financial Position:

Working capital 2,062,505 2,123,855
Property, plant and equipment, net 2,587,356 2,873,009
Total assets 8,326,540 11,488,023
Total liabilities 9,526,192 9,776,838
Stockholders' equity (deficit) (1,199,652) 1,711,185

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1. Consider the notes listed as follows:

7.5% senior secured notes due January 2015

a. What is the face value of these notes? Explain how you know.

b. What journal entry would Rite Aid have made when these notes were issued?

c. What journal entry would Rite Aid make to record annual interest expense on these
notes?

d. Rite Aid repurchased these notes in the open market in fiscal 2009, paying $236,558.
What journal entry would Rite Aid have made to record this transaction?

e. Was the market rate of interest higher than, lower than, or the same as the coupon rate on
these notes

at the date they were issued?

at the date they were repurchased?

2. Consider the notes listed as follows:

10.375% senior secured notes due July 2016

These notes were issued at 90.5875% of par.

a. What journal entry would Rite Aid have made when these notes were issued?

b. What is the amount of interest to be paid by Rite Aid on these notes in fiscal 2010?
Round your answer to thousands.

c. Will the amount of interest expense recognized on these notes in fiscal 2010 be higher
than, lower than, or the same as the amount of interest paid? Explain.

d. What is the total amount of interest expense that Rite Aid will recognize over the life of
these notes? Round your answer to thousands.

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3. Assume that you are a credit analyst and would like to compare Rite Aid to other firms in the
Retail Pharmaceutical industry.

a. Calculate common-size liabilities and common-size interest expense for Rite Aid for
2009 and 2008. Round your answers to two decimal places.

Common- Industry Rite Aid Rite Aid

Size: Average 2009 2008

Liabilities 43.83%

Interest
0.35%
expense

b. Based on your analysis, what conclusion would you reach about Rite Aids solvency and
ability to meet its long-term commitments?