III. Bond Issuance A. Assuming this company already has bonds outstanding, calcu
ID: 2804340 • Letter: I
Question
III. Bond Issuance A. Assuming this company already has bonds outstanding, calculate the following: 1. The new value of the bond if overall rates in the market increased by 5% 2. The new value of the bond if overall rates in the market decreased by 5% 3. The value of the bond if overall rates in the market stayed exactly the same B. What effect would you expect each of the calculations you performed to have in terms of the company’s decision to raise capital in this manner? In other words, for each situation, would you consider bond valuation to be a viable option for increasing capital? Be sure to justify your reasoning. C. To what extent do you feel the company’s bond issuance policies support or hinder their strategies? For example, if the company is attempting to fund operating expenses, refinance old debt, or change its capital structure, are they issuing sufficient bonds to achieve these goals? Be sure to substantiate your claims
PART II: BOND ISSUANCE
III. Bond Issuance A. Assuming this company already has bonds outstanding, calculate the following: 1. The new value of the bond if overall rates in the market increased by 5% 2. The new value of the bond if overall rates in the market decreased by 5% 3. The value of the bond if overall rates in the market stayed exactly the same B. What effect would you expect each of the calculations you performed to have in terms of the company’s decision to raise capital in this manner? In other words, for each situation, would you consider bond valuation to be a viable option for increasing capital? Be sure to justify your reasoning. C. To what extent do you feel the company’s bond issuance policies support or hinder their strategies? For example, if the company is attempting to fund operating expenses, refinance old debt, or change its capital structure, are they issuing sufficient bonds to achieve these goals? Be sure to substantiate your claims
PART II: BOND ISSUANCE
Curent Bonds from Financial Statements Present Value PV ($2,963) Periods N 40 Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods Interest I 2.9375 Interest paid semi-annually: 5.875%/2 = 2.9375% Payments PMT 0 This bond does not make regular PMT except for interest Future Value FV $2,963.01 CALCULATING FV (please see help on the right hand side) 1. The new value of the bond if overall rates in the market increased by 5% Present Value PV ($2,963) Periods N 40 Interest I 5.4375 Please adjust interest 5.875%+5% = 10.875%/2 = 5.4375% Payments PMT 0 Future Value FV $12,926.71 CALCULATING FV (please see help on the right hand side) 2. The new value of the bond if overall rates in the market decreased by 5% Present Value PV ($2,963) Periods N 40 Interest I 0.4375 Please adjust interest 5.875%-5% = 0.875%/2 = 0.4375% Payments PMT 0 Future Value FV ($267.37) CALCULATING FV (please see help on the right hand side) 3. The value of the bond if overall rates in the market stayed exactly the same - identical to CURRENT BOND VALUE from Financial StatementsExplanation / Answer
PART II: BOND ISSUANCE
Curent Bonds from Financial Statements
Present Value
PV
($2,963)
Periods
N
40
Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods
Interest
I
2.9375
Interest paid semi-annually: 5.875%/2 = 2.9375%
Payments
PMT
0
This bond does not make regular PMT except for interest
Future Value
FV
$9,433.58
CALCULATING FV (please see help on the right hand side)
1. The new value of the bond if overall rates in the market increased by 5%
Present Value
PV
($2,963)
Periods
N
40
Interest
I
5.4375
Please adjust interest
5.875%+5% = 10.875%/2 = 5.4375%
Payments
PMT
0
Future Value
FV
$24,634.04
CALCULATING FV (please see help on the right hand side)
2. The new value of the bond if overall rates in the market decreased by 5%
Present Value
PV
($2,963)
Periods
N
40
Interest
I
0.4375
Please adjust interest
5.875%-5% = 0.875%/2 = 0.4375%
Payments
PMT
0
Future Value
FV
$3,528.32
CALCULATING FV (please see help on the right hand side)
3. The value of the bond if overall rates in the market stayed exactly the same
- identical to CURRENT BOND VALUE from Financial Statements
Explanations:
Cash Dividend - distribution of the corporate income. They are not expenses and do not appear on Income Statement.
Note: Part of Statement of Cash Flows. Please be aware that corporation list 5 years worth of dividends, but only 3 years worth of dividend yields. (Hint: research F-1)
Dividend Yield - annual cash dividend per share of common stock divided by the market price of a share of the common stock. (Dividend yield = Annual Dividend/Current Stock Price)
Note: Current Stock Price is not part of the Financial Statements - calculated suing the formula for Dividend Yield
Stockholder's Equity = Assets - Liabilities. This represents the ownership of a corporations. Owners are called stockholder because they hold stocks or share of the company. The main goal of every corporate manager is to generate shareholder value.
Return on Equity - for this part we will modify and use return on investment instead.
Using the formula: Dividend (+1.75)/+[(new price-old price)/old price]
Note - for this part, you will need extra price from 2011
Bonds are a long-term debt for corporations. By buying a bond, the bond-owner lends money to the corporation. The borrower promises to pay specified interest rate during the loans lifetime and at the maturity, payback the entire principle. In case of bankruptcy, bondholders have priority over stockholders for any payment distributions.
Bonds = Debt...............Bondholders = Lenders
Stock=Equity................Stockholders = Owners
Calculation: Please note that for bond calculations, only one bond was used and we assume that February 1st, 2015 is the origination date. The value on financial statements will be considered PV (Present value). Maturity date would be also assumed for February 2036 and payment schedule would be adjusted to February 1 and August 1.
The following Senior-Note was used from page 44:
5.875% Senior Notes; due December 16, 2036; interest payable semi-annually on June 16 and December 16
PV (Present Value) = 2,963 million
Our scenario: 5.875% Senior Notes; due February 1, 2036; interest payable semi-annually on February 1 and August 1
PV (Present Value) = 2,963 million
FV (Future Value Calculation) - using Excel Formula
Step 1) Select Formulas
Step 2) Click on Financial
Step 3) Select FV - you will see the formula below
Step 4) Enter the following:
Rate - enter as decimal, no % sign. Example: 4% as 0.04
Nper - number of period. Enter a whole number. Example 50
Pmt - payment. Our example does not assume regular payments disbursing principal
Pv - Present value. Enter as negative. Example $1,000 should be -1000
Type - leave blank
PART II: BOND ISSUANCE
Curent Bonds from Financial Statements
Present Value
PV
($2,963)
Periods
N
40
Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods
Interest
I
2.9375
Interest paid semi-annually: 5.875%/2 = 2.9375%
Payments
PMT
0
This bond does not make regular PMT except for interest
Future Value
FV
$9,433.58
CALCULATING FV (please see help on the right hand side)
1. The new value of the bond if overall rates in the market increased by 5%
Present Value
PV
($2,963)
Periods
N
40
Interest
I
5.4375
Please adjust interest
5.875%+5% = 10.875%/2 = 5.4375%
Payments
PMT
0
Future Value
FV
$24,634.04
CALCULATING FV (please see help on the right hand side)
2. The new value of the bond if overall rates in the market decreased by 5%
Present Value
PV
($2,963)
Periods
N
40
Interest
I
0.4375
Please adjust interest
5.875%-5% = 0.875%/2 = 0.4375%
Payments
PMT
0
Future Value
FV
$3,528.32
CALCULATING FV (please see help on the right hand side)
3. The value of the bond if overall rates in the market stayed exactly the same
- identical to CURRENT BOND VALUE from Financial Statements