Interest Rate Swap Terminations In July 2011, Medtronic terminated interest rate swap contracts associated with the company’s $2.2 billion, 1.625% 2013 convertible note and $550 million, 4.5% 2009 note due in 2014. At the time of the termination, the swap contracts were classified as assets and resulted in a $46 million cash receipt including $10 million in accrued interest, reducing the 2011 interest expense. In August 2011, the company terminated an interest rate swap agreement related to the $1.23 billion, 3% 2010 note due in 2015. The contracts were classified as assets at the termination and resulted in a cash receipt of $42 million including $7 million in accrued interest, reducing the 2011 interest expense. Interest Rate Swap Terminations- Projected As of April 26, 2013, the market value of interest rate swap contracts is valued at an unrealized gain of $181 million40. Under the assumption that Medtronic continues to benefit from these agreements, MDT is able to realize the gain in upcoming years in the form of cash receipts and reduction of annual interest expense. Based on the projected one month LIBOR rates presented below, LIBOR remains at or below 2.5% over the next eight years. With Medtronic’s current interest rate swap contracts floating above LIBOR between 37 and 92 basis points, MDT continues to benefit from the swap agreements in the future and terminates them resulting in gains. Cost of Debt Estimated Cost of Long-Term Debt (2.45%) The cost of long-term debt is calculated based on book values of the bonds outstanding. A weight was assigned to each bond by dividing its respective book value by the total book value of bonds outstanding. The weight of each bond is then multiplied by the current yield, found using Excel’s function, producing a yield”. The weighted yields are then added “YIELD” “weighted resulting in a pre-tax cost of debt of 2.55%. Next, a debt adjustment factor of 1.24 is applied to the pre-tax cost of debt giving rise to an adjusted pre-tax cost of debt of 3.16%. The debt adjustment factor takes into account the credit rating of Medtronic based on Standard & Poor’s credit rating on long-term debt, which is A+. A credit rating of A+ has a corresponding value of five, which is then divided by 21 (the overall number of levels in the rating scale). Finally, one is
Interest Rate Swap Terminations In July 2011, Medtronic terminated interest rate swap contracts associated with the company’s $2.2 billion, 1.625% 2013 convertible note and $550 million, 4.5% 2009 note due in 2014. At the time of the termination, the swap contracts were classified as assets and resulted in a $46 million cash receipt including $10 million in accrued interest, reducing the 2011 interest expense. In August 2011, the company terminated an interest rate swap agreement related to the $1.23 billion, 3% 2010 note due in 2015. The contracts were classified as assets at the termination and resulted in a cash receipt of $42 million including $7 million in accrued interest, reducing the 2011 interest expense. Interest Rate Swap Terminations- Projected As of April 26, 2013, the market value of interest rate swap contracts is valued at an unrealized gain of $181 million40. Under the assumption that Medtronic continues to benefit from these agreements, MDT is able to realize the gain in upcoming years in the form of cash receipts and reduction of annual interest expense. Based on the projected one month LIBOR rates presented below, LIBOR remains at or below 2.5% over the next eight years. With Medtronic’s current interest rate swap contracts floating above LIBOR between 37 and 92 basis points, MDT continues to benefit from the swap agreements in the future and terminates them resulting in gains. Cost of Debt Estimated Cost of Long-Term Debt (2.45%) The cost of long-term debt is calculated based on book values of the bonds outstanding. A weight was assigned to each bond by dividing its respective book value by the total book value of bonds outstanding. The weight of each bond is then multiplied by the current yield, found using Excel’s “YIELD” function, producing a “weighted yield”. The weighted yields are then added resulting in a pre-tax cost of debt of 2.55%. Next, a debt adjustment factor of 1.24 is applied to the pre-tax cost of debt giving rise to an adjusted pre-tax cost of debt of 3.16%. The debt adjustment factor takes into account the credit rating of Medtronic based on Standard & Poor’s credit rating on long-term debt, which is A+. A credit rating of A+ has a corresponding value of five, which is then divided by 21 (the overall number of levels in the rating scale). Finally, one is