Homework SourseOn August 1 1998 Georgina Comer CFO of Globalcom Inc was mee
On August 1, 1998, Georgina Comer, CFO of Globalcom Inc. was meeting with the team of investment bankers who were helping Globalcom issue bonds worth $ 6 Billion. The company planned to issue $2 Billion in medium term bonds that will mature in 5 Years and $4 billion in long-term bonds with a maturity of 30 years. Since Globalcom was issuing US dollar denominated bonds, these bonds were expected to make semi-annual coupon payments. The bankers had put together a report on current market trends and the exhibits below provide some of the information that was included in the report that Georgina received. At the time all of Globalcom’s bonds were rated A+ by S&P, but after the issue, it was widely expected that all of Globalcom’s bonds’ ratings would go down to BBB+.
Exhibit 7 –Interest rate on US Government Bonds
Month
Ending
Week Ending
June
July
July
July
July
Yields to Maturity in % per annum
1998
10
17
24
31
3-month
5.12
5.08
5.15
5.08
5.07
6-month
5.32
5.23
5.23
5.25
5.21
1-year
5.41
5.34
5.36
5.36
5.37
2-year
5.52
5.43
5.46
5.47
5.48
3-year
5.52
5.44
5.48
5.47
5.48
5-year
5.56
5.41
5.47
5.47
5.51
7-year
5.56
5.47
5.54
5.52
5.56
10-year
5.50
5.41
5.49
5.46
5.50
20-year
5.80
5.71
5.82
5.79
5.83
30-year
5.70
5.61
5.71
5.68
5.73
Exhibit 8 – Spreads (in Basis Points) of Industrial Corporate Bonds over comparable Maturity US treasury Bonds
Exhibit 9: The Value line Forecast of future dividends for Globalcom.
Valueline estimated that the cost of equity for Globalcom was 12% and it estimated that the firm will continue to grow its dividends at a rate of 5% per year forever beyond 2003.
Year
Dividend Per Share ($)
1999
$ 1.38
2000
$ 1.52
2001
$ 1.66
2002
$ 1.78
2003
$ 1.80
a. Estimate the yield to maturity (YTM) that Globalcom would have had to offer to investors for the 5 year bonds if they were to be issued today?
| Month | ||||||
| Ending | Week Ending | |||||
| June | July | July | July | July | ||
| Yields to Maturity in % per annum | 1998 | 10 | 17 | 24 | 31 | |
| 3-month | 5.12 | 5.08 | 5.15 | 5.08 | 5.07 | |
| 6-month | 5.32 | 5.23 | 5.23 | 5.25 | 5.21 | |
| 1-year | 5.41 | 5.34 | 5.36 | 5.36 | 5.37 | |
| 2-year | 5.52 | 5.43 | 5.46 | 5.47 | 5.48 | |
| 3-year | 5.52 | 5.44 | 5.48 | 5.47 | 5.48 | |
| 5-year | 5.56 | 5.41 | 5.47 | 5.47 | 5.51 | |
| 7-year | 5.56 | 5.47 | 5.54 | 5.52 | 5.56 | |
| 10-year | 5.50 | 5.41 | 5.49 | 5.46 | 5.50 | |
| 20-year | 5.80 | 5.71 | 5.82 | 5.79 | 5.83 | |
| 30-year | 5.70 | 5.61 | 5.71 | 5.68 | 5.73 |
Solution
(a)
Spread over US govt bonds = corporate bond YTM - US govt bond YTM
=> Corporate bond YTM = Spread over US govt bonds + US govt bond YTM
Given that the 5-year spread for A+ bonds is 42bp (0.42%) and US Govt bond yield at the end on July (just before the issue date) is 5.51%,
Globalcom bond yield to be offered = 5.51+0.42=5.93%
