In May 2016, Starbucks issued long-term debt in a registered public offering, wh

Question

In May 2016, Starbucks issued long-term debt in a registered public offering, which consisted of $500 million of 10-year 2.50% Senior Notes (the “2026 notes”) due June 2016. Interest on these Senior Notes is payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2016. The cash payments to the 2016 Senior Note holders over the life of the note will be $625 million. This is based on twenty (20) interest payments of $6.25 million ($500 million x 2.50% x 6/12) for a total of $125 of interest payments plus $500 million at maturity.

Assuming the Senior Notes were issued at par (i.e., the market rate equals the coupon rate at issuance), what would be Starbucks’ cash proceeds from the notes’ issuance?

Explanation / Answer

If senior Notes were issued at par (i.e., the market rate equals the coupon rate at issuance),

Starbucks’ cash proceeds from the notes’ issuance=Par value=$500 million

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