The methodology used to evaluate the value relevance of financial statement information can also be used to evaluate security market reaction to other events affecting firm value.
For example, on April 30, 2012, financial media reported that Apple Inc. sold $ 19 billion of bonds of various maturities. The proceeds were to help finance a $ 100 billion cash return to shareholders, including a share buyback of $ 60 billion. In this way, Apple was attempting to increase its share price, which had fallen from $ 705 in September 2012 to $ 385 in mid - April 2013. Also, Apple was taking advantage of low interest rates in the economy. For example, the interest rate on the 10- year portion of its bond issue was only 2.4%.
Apple’s share price increased by 9.02% for the week ended April 30, 2013, closing at $ 442.78. Its beta at the time, as per Reuters, was .99. Apple’s shares trade on the NASDAQ exchange. For the week ended April 30, 2013, the NASDAQ Composite Index closed at 3,328.79, after opening the week at 3,262.21. The U. S. Federal Funds Rate at the time was 0.15% per annum.
a. Did the market for Apple’s shares react favourably or unfavourably to the bond issue during the week ended April 30, 2013? Take calculations to four decimal places. Note that a j in the market model formula is equivalent to Rf (1 2 b j) in the CAPM, where Rf is proxied by the weekly Federal Funds Rate.
b. A market analyst at the time was quoted as saying that, generally speaking, it is not wise to buy bonds used to finance a share buyback. Do you agree or disagree? Give reasons.