Dollar General 2006 Annual Report Download - page 46

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Financial Risk Management
We are exposed to market risk primarily from adverse changes in interest rates. To
minimize this risk, we may periodically use financial instruments, including derivatives. As a
matter of policy, we do not buy or sell financial instruments for speculative or trading purposes
and all financial instrument transactions must be authorized and executed pursuant to approval
by the Board of Directors. All financial instrument positions taken by us are used to reduce risk
by hedging an underlying economic exposure. Because of high correlation between the financial
instrument and the underlying exposure being hedged, fluctuations in the value of the financial
instruments are generally offset by reciprocal changes in the value of the underlying economic
exposure. The financial instruments we use are straightforward instruments with liquid markets.
We have cash flow exposure relating to variable interest rates associated with our
revolving line of credit and tax increment financing, and may periodically seek to manage this
risk through the use of interest rate derivatives. The primary interest rate exposure on variable
rate obligations is based on the London Interbank Offered Rate (“LIBOR”). We were not party
to any interest rate derivatives in 2006 or 2005.
At February 2, 2007 and February 3, 2006, the fair value of our debt, excluding capital
lease obligations, was approximately $265.7 million and $281.0 million, respectively, based
upon the estimated market value of the debt at those dates. The February 3, 2006 amount is net
of the fair value of a note receivable relating to the South Boston, Virginia DC of approximately
$49.5 million, as further discussed in Note 8 to the Consolidated Financial Statements. Such fair
value exceeded the carrying values of the debt at February 2, 2007 and February 3, 2006 by
approximately $14.0 million and $24.2 million, respectively.
Based upon our variable rate borrowing levels, a 1% adverse change in interest rates
would have resulted in a pre-tax reduction of earnings and cash flows on an annualized basis of
approximately $1.3 million in 2006, $0.1 million in 2005 and less than $0.1 million in 2004.
Based upon our outstanding indebtedness at February 2, 2007 and February 3, 2006, a 1%
reduction in interest rates would have resulted in an increase in the fair value of our fixed rate
debt of approximately $9.2 million and $12.2 million, respectively.
44