Fiance Problem

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?

b. To the nearest cent, what price per $100 of face value would Georgina have gotten for her 30 year bonds if she decides to set the coupon rate at 6% for these bonds?

c. To the nearest cent, what would be your estimate of intrinsic value of Globalcom equity share?