Tombstones Case

Case: Tombstones (HBS 5-213-085)

Assignment:

1. MSFT Notes:

a. Why is MSFT raising money?

i. Microsoft was raising money for, according to them “general corporate purposes which may include funding for working capital expenditures, repurchases of stock and acquisitions.” However, it so happened that the day before the bond issuance Microsoft had also raised their dividends per share by 23% and pressed for cash due to taxes they would incur if they were to pay those dividends with the cash the corporation had which was mostly overseas.

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

i. These bonds are very cheap because of the very low yield being offered by U.S. Treasury Instruments in September 2010, during the issuance of these bonds; Microsoft actually set a record with its 4 offering for being the lowest yield for unsecured debt to date at the time since record keeping started.

1. 2013 Notes YTM = 0.9309%

2. 2015 Notes YTM = 1.7170%

3. 2020 Notes YTM = 3.1012%

4. 2040 Notes YTM = 4.5670%

a. Formula used:

i. Did work on attached excel sheet.

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

i. The YTM differs from the coupon rate because it takes into account the discounting of the original principle; the price to public verses the future. The YTM should be compared with the coupon rate in order to see what sort of premium or discount the bond is yielding.

d. Why did MSFT issue four papers instead of one?

i. Microsoft issued four different papers so that it would not have to pay back all of the $4.75 billion in principle back at one time. By issuing the way they did they are able to return segments the total sum where their operations are not affected.

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

i. These notes will likely be redeemed at maturity because of their extremely low coupon rate. MSFT would be at a loss if it decided to call the bond and then issue another bond at what could likely be a higher rate.

http://www.bloomberg.com/news/articles/2010-09-22/microsoft-sells-4-75-billion-of-bonds-with-portion-at-record-low-coupon

2. Coca Cola Enterprise Notes:

a. What is YTM for CCE issue?

i. 2013 Notes YTM = 3.8169%

ii. 2015