Financial Accounting in an Economic Context, 9th Edition

PART 4

Liabilities and Shareholders' Equity: A Closer Look

Apple Inc. is well-known as the manufacturer of the popular technology products iPad, iPhone, and iPod. The success of the company's innovative products clearly can be seen on its 2012 balance sheet with over $120 billion of cash and marketable securities. Despite this extremely strong liquidity position, in April, 2013, the company issued bonds to raise $17 billion of additional cash. Interest rates on the bonds ranged from 0.45 percent for the short-term debt to 3.85 percent for the bonds with maturities of thirty years. Analysts following the company commented on the motivation for the bond issuance, citing areas such as future investments into new products, aggressive tax planning, historically low interest rates, and just simply to increase its leverage position.

At the same time, Hewlett-Packard, a rival technology company, was active in the opposite direction, paying down its long-term debt. When HP released its quarterly financial statements in May, 2013, the market was surprised and pleased that the company was ahead of schedule on an announced “de-leveraging” plan; shares in the company immediately bounced up 17 percent with the news that equity is taking a larger role in the capital structure of the company.

Why do companies issue debt? What form can the debt take? And why do some analysts consider a reduction of debt a good thing, while others laud the upside of using leverage to finance a business? What is ...