Tombstones Case Essay

Published: October 22, 2015 Words: 346

Casey Tull

Sarah Rooding

Finance473

Case Study 1: Tombstones (HBS 5-213-085)

MSFT Notes:

(a) Why is MSFT raising money?

They are raising money through 4 series of unsecured notes because they want to use the money for its general corporate purposes. These consist ofccapital expenditures, funding of working capital, repurchase of stocks and acquisitions.

(b) Is this paper really cheap? What is YTM for each issue?

No, the yields for treasury instruments are very low at the time resulting in a lower premium for the company. This leads to the investors getting less money for the same amount of riskiness, so the paper is not really cheap.

YTMs for these 4 issues are the following:

2013 notes: 0.93%

2015 notes: 1.72%

2020 notes: 3.06%

2040 notes: 4.56%

(c) Why YTM differs from coupon rate? What should we compare YTM with?

YTM is the rate of return approximated on a bond if held until the maturity date, and the coupon rate is the interest paid per year, and is shown as a percentage of the bonds face value. For this case, YTM is different from the coupon rate since the issued price does not equal the face value of the unsecured notes. YTM should be comparative with the return on bonds.

(d) Why did MSFT issue four papers instead of one?

They issued four papers because each of the papers contains different maturities resulting in the fact that MFST would be able to take advantage of the changing market dynamics and interest rates over the years of its debt maturity in the future.

(e) Do you expect that those notes will be called or redeemed?

I expect neither. The notes were issued at a record low yield rate, and thus the company is not exactly in a situation that they would be able to raise debt in the future at that rate.

Coca Cola Enterprise Notes:

(a) What is YTM for CCE issue?

YTM=3.909%

(b) What are the differences w.r.t. MSFT note above?

Both notes are unsecured, but CCE differentiate from MSFT notes because they virtually are...