Theory of financial management | Business & Finance homework help

Hi ,

Please find below the link and question for my assignment :

http://www.wsj.com/articles/SB10001424052748703509104576327233056601082

Cash-Rich Google Sells First Bonds

By 

AMIR EFRATI And

 

KELLIE GERESSY-NILSEN

Updated May 17, 2011 12:01 a.m. ET

(Please see Corrections & Amplifications item below.)

Google Inc. sits on $37 billion in cash. But Monday it sold its first bonds, some $3 billion worth, to take advantage of corporate interest rates that are moving swiftly lower.

Tech companies have typically avoided debt offerings, choosing to fund operations from cash. But Monday’s deal was simply too good to miss, said David Trahan, a banker at Citigroup who helped lead the deal. “Everyone thinks that before too long, rates will go up.”

WSJ’s Kellie Geressy-Nilsen has the story of Google issuing $3 billion in bonds in hopes of taking advantage of lower corporate interest rates. (AP Photo/Virginia Mayo, File)

Demand was extremely strong for the bonds, with orders exceeding $10 billion, said a person familiar with the matter. Google could have easily doubled its offering, this person added, and locked in rates at an all-time low.

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Bill Larkin, portfolio manager at Cabot Money Management in Boston, said given the payout on the debt offering, Google is essentially getting “free money.”

Google issued three-year, five-year and 10-year bonds, all within a very tight range of the benchmark U.S. Treasurys against which corporate bonds are priced.

ENLARGE

Google is taking advantage of low borrowing costs. BLOOMBERG NEWS

The 10-year bond, for instance, will yield 3.734%, compared to 10-year Treasurys, which yield 3.15%.

Bond yields–which move inversely to bond price–have continued to drop this spring, a surprise to many who expected yields to rise as the Federal Reserve pulled from its “QE2” bond-buying program.

The bonds might be helpful should Google pursue acquisitions.

“It’s very easy for a company like Google to prefund the purchase of another company at such attractive rates,” Mr. Larkin said.

Margie Patel, a senior portfolio manager at Wells Capital Management, said large technology companies are using debt offerings to “buy a very cheap, long-term insurance policy that gives them flexibility for whatever the economy throws at them, in case of acquisition opportunities, or if their cash flow changes down the road.”

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Until the Google deal, nearly $17 billion in debt had been issued in 17 deals in the tech sector so far this year, according to Thomson Reuters. Cisco Systems Inc.,Dell Inc., and International Business Machines Corp. were among other debt issuers this year in deals ranging from $1 billion to $4 billion.

Corrections & Amplifications 
GoogleInc. is issuing three-year, five-year and 10-year bonds. A previous version of this Marketplace article incorrectly said the company was issuing one-year bonds. The 10-year yield at issuance was 3.734%, not 3.374% as stated in the article.

Write to Amir Efrati at [email protected]

 

 

Question:

1. Why is Google’s bond offering unusual?
2. What is Google’s rational for issuing the bonds?
3. The rational for Google’s issuance is consistent with which capital structure theory discussed in the chapter?

 

I will appericate it if I can get the answer on Sunday by 16:53 Central Time.

 

Kind regards….Daniel