I have to do a research paper on the finance of GameStop, and I'm having problem with the first two questions:
1. If GameStop Corp chose to issue another round of corporate bonds, how much interest rate should they offer?
2. Assume that GameStop Corp did issue corporate bonds at your determined bond interest rate. Also assume they used bonds for 30% of their 2009 capitalization. By issuing 30% of their 2009 capitalization in bonds, what difference would result in the earnings per share of common stock?
Illustrate using Excel.
I know you might not be able to tell me the answer without background information, but if anyone could tell me where to start, I'd appreciate it.
To determine the interest rate for corporate bonds that GameStop Corp should offer, you would typically need specific financial information about the company, such as its credit rating, financial health, market conditions, and industry norms. However, I can provide you with a general approach to estimating the interest rate for corporate bonds.
1. Start by researching GameStop Corp's current credit rating from reputable credit rating agencies such as Moody's or Standard & Poor's. Credit ratings affect the interest rate on corporate bonds because they reflect the company's creditworthiness and the risk associated with lending to the company.
2. Identify comparable bonds issued by other companies in the same industry or with similar credit ratings. Look for bonds with similar characteristics, such as maturity, coupon rate, and risk profile. This will help you gauge the prevailing interest rates in the market.
3. Use the current yield on comparable bonds as a starting point to estimate the interest rate for GameStop Corp's bonds. Adjust the rate based on factors such as GameStop's credit rating, financial performance, outlook, and any other relevant information you find during your research. You may need to make subjective judgments based on the available information.
4. Keep in mind that interest rates can also be influenced by broader economic factors such as inflation, monetary policy decisions, and market conditions. Consider the prevailing interest rate environment and any foreseeable changes.
As for the second question, to determine the impact on earnings per share (EPS) of GameStop Corp's common stock after issuing bonds, you will need the following information:
1. The current number of outstanding shares of GameStop Corp's common stock.
2. The current earnings of GameStop Corp, typically reported as earnings per share.
3. The bond interest rate determined from the first question.
To illustrate this in Excel, you can follow these steps:
1. Create a new Excel spreadsheet and label the columns as "Shares Outstanding," "Earnings per Share (EPS)," and "New Bond Interest Rate."
2. Enter the current number of outstanding shares in the "Shares Outstanding" column.
3. Enter the current earnings per share in the "EPS" column.
4. Enter the bond interest rate you determined in the first question in the "New Bond Interest Rate" column.
5. Calculate the new earnings per share by subtracting the interest expense from the original EPS.
- Multiply the bond interest rate by the bond capitalization (30% of 2009 capitalization) to obtain the interest expense.
- Subtract the interest expense from the original EPS to get the new EPS.
6. Update the results whenever you have new information or want to analyze different scenarios.
Remember, the accuracy and relevance of your calculations will depend on the quality of data and assumptions you use, so it's important to conduct thorough research and consider multiple factors.