Case Study II: Sleeping Beauty Bonds

Name
Imitation affiliated
Instructor
Course
Date
 2

Case Study II: Sleeping Beauty Bonds

1.
In July of 1993, Disney issued senior debentures with a total value of $300 million.

Nevertheless, no payments made would've been made at the time of the offering, and the

bonds would be released to the bondholders—actual cash of $ 300,000,000 with a

principal amount of $ 100 at the delivery date. Following delivery, the corporation will

pay 7.55 percent interest to all bondholders, and the interest will be paid semiannually,

meaning bondholders will receive interest payments twice a year. If the interest is paid

semiannually, the first interest payment will be made in December 1993, followed by the

second interest payment in July 1994, and so on. Finally, when the bonds reach maturity in

2093, the corporation will return all bondholders the full principal amount as well as the

last interest payment. One item to keep in mind is that if the issuers decide to call the

bonds after 30 years, they must do so at a price of $ 103.02 on each bond's par value of $

100.

2.
Given that the bonds are valued at a par value of $ 100 per bond, we computed the

present value using a 7.55 percent interest rate, a 6.55 percent interest rate, and an 8.55

percent interest rate. As can be observed, the interest rate utilized by the firm to price the

bonds is precisely 7.55 percent and is neither greater nor lower than this rate of interest.

3.
If the current interest rate increased by 1% the day after the bonds were issued, the

only possible explanation is that demand decreased, and the bonds' demand would not

have been as robust. As a result, the firm will have increased the interest rate or coupon

rate on the bonds in order to boost demand. Additionally, if the interest rate is adjusted

from 7.55 percent to 8.55 percent, the bond's new price must equal $ 88.31 per bond.
 3

4
On the other hand, the price of the bond might also have altered if the interest rate

had been lowered. For instance, if we assume that the interest rate decreases by one basis

point from 7.55 percentage to 6.55 percent, the new bond price must be $75.50.

5.
The maturity or maturity date for callable bonds is 100 years, and the length of the

bond issues is a rare one, which is also the case. Therefore, it is acceptable to suppose that

country's economic conditions and market situations may vary significantly throughout

this long period. Interest rates could vary from 0% to 20%, which is reasonable to be

anticipated. The rates of interest might potentially swing above 20%. In addition, the

current worth of each of the sleeping beauties is $ 339.20 with a 2 percent interest rate and

$ 37.75 with a 20 percent interest rate.

6
a)
Looking at the interest rate of 7.55%, the sleeping beauty and the napping beauty

prices are equal to 100 $ each bond. The cause is straightforward since 7,55% is

practically the market interest rate or, in other words, the maturity return for both types of

bonds and all other bonds on the market. Furthermore, if the bond yields remain at 7.55%,

the predicted price trajectory followed by sleeping beauty may be equivalent to or close to

$100.

b)
Suppose the prevailing interest rates in the market fluctuate considerably over the

next two years. In that case, the bond price also fluctuates, with a decline in demand for

the bonds and, finally, a rise in bond prices, since the company starts to offer a coupon rate

which would be significantly higher than the prevalent maturity rates if the interest.
 4

7
a)
Napping bonds because their price is not as susceptible to interest rate fluctuations

b)
Since sleeping beauty connections last longer, they are much more sensitive. This

is due to a prolonged maturity.

7c and 8
Looking at the graph for interest rate values of both types over 7.55 percent, it

could be observed that the 10-year bonds are valued more than the 100-year bonds, which

is because of the lesser time to maturity of the bonds. Similarly, let's evaluate interest rate

pricing for bonds of less than 7.55 percent. The 100-year coupon bond may be shown to

have an increased value because now the longer duration is advantageous for the firm

because of a drop in interest rates. Finally, it might be stated that the 100-year bonds are

much more sensitive to the change in interest rates, glancing at both curves.

9
a)
The payment pattern of cash flows to shareholders after the fiscal year (dividends

and share prices) would rely on profitability. This pattern (coupling rate and principle) is

set for holders of Sleeping Beauty and would after that get fixed interest payments on their

bonds.

b)
Those holding Disney ordinary shares estimate a return rate of more than 7.55% as

holding stocks have more dangers than bonds

c)
 5

Average price of stock (1993) = $ 38.5 Rate of return (r) = + > 7.55%  - 1 > 0.0755

 > 1.0755

 P1 > 41.15 So the average price of Disney stock has to increase to be more than $41.15 this
year
d)
“P0 =; P1= = 12”

“Fundamentals of Corporate Finance | Group 10 – Advanced Accounting K56”

“ = 1+g > 1.067  g > 0.067  g > 6,7 % So Disney must increase its dividends more than
6,7% to merit such an increase in its stock price”
10)

A leveraged recapitalization in Corporate Finance is a shift in the capital structure

of the firm, generally replacing equities with debt. Leveraged recapitalization is used as a

refinancing tool by private enterprises to provide shareholders with cash while not

necessitating a complete sale of the firm. In the instance of Disney, the firm can issue

bonds (as a method to address debt) to raise money since they can profit from taxes and

implement a cash discipline. Due to Disney's investor trust, Disney has a great potential to

earn money from sales of bonds. It offers financial leverage to the firm. When cash inflow

is larger than the company's operational expenditures, its financial leverage grows.

Leveraged recapitalization can also benefit Disney as a tax shelter. Higher debt implies

cheaper corporate taxes. Therefore, it is a good candidate.

 6

Reference

Walt Disney Company's Sleeping Beauty Bonds