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Homework_2_solutions - UNIVERSITY OF NORTH CAROLINA AT...

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U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN -F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE S OLUTIONS TO A SSIGNMENT #2 P ROF . A RZU O ZOGUZ F ALL 2009 1. Giant Industries (stock symbol GI) is a petroleum refiner and marketer in the American Southwest. The firm’s shares are listed on the New York Stock Exchange. Below is what the company had to say about its bonds in its 1999 Annual Report issued on August 31, 1999: The Company’s capital structure includes $150,000,000 of 9% senior subordinated notes due 2007 (refered as the “9% Notes”) and $100,000,000 of 9¾% senior subordinates notes due 2003 (refered the “9¾% Notes”, and collectively with the 9% Notes, the “Notes”). The Indentures supporting the Notes contain restrictive covenants that, among other things, restrict the ability of the Company and its subsidiaries to create liens, to incur or guarantee debt, to pay dividends, to repurchase shares of the Company’s common stock, to sell certain assets or subsidiary stock, to engage in certain mergers, to engage in certain transactions with affiliates or to alter the Company’s current line of business. At December 31, 1999, the Company was in compliance with the restrictive covenants relating to these Notes. The Company had been precluded from making restricted payments from the third quarter of 1998 until June 30, 1999, because it did not satisfy a financial ratio test contained in one of the covenants relating to the 9¾% Notes. This included the payment of dividends and repurchases of shares of the Company’s common stock. The terms of the Indenture also had restricted the amount of money the Company could otherwise borrow during this period. The Company is no longer subject to these restrictions, as the Company currently satisfies the requirements of the covenant’s financial ratio test. Assume that both notes were issued on September 1, 1997 and they both make semi-annual payments. a. How many of the 9% Notes were issued if each has a face value of $1000? What are the cash flows associated with each? 150,000 bonds were issued. The 9% Notes should be making coupon payments of ଽ%ൈଵ଴଴଴ ൌ 45 every six months (March and September) until September of 2007 at which time the face value of $1000 becomes due. b. If the company received $146.8 million from the 9% Notes issue, what rate of return did the investors require? Put differently, what was promised rate of return on this bond? What is the effective yield on the bond?
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If $146.8 million was received from the sale of 150,000 bonds, each bond must have sold at $ଵସ଺.଼ ௠௜௟௟௜௢௡ ଵହ଴,଴଴଴ ൌ 978.67 for each bond. To find the yield to maturity at issue: 978.67 ൌ 45 ൦ 1 െ 1 ሺ1 ൅ ݎሻ ଶ଴ ݎ ൪ ൅ 1000 ሺ1 ൅ ݎሻ ଶ଴ ՜ ݎ ൌ 4.67% ܻܶܯ ൌ 4.67% ൈ 2 ൌ 9.3% ܧ݂݂݁ܿݐ݅ݒ݁ ݕ݈݅݁݀ ൌ ൬1 ൅ 9.3% 2 െ 1 ൌ 9.55% c. What should be the price for the 9% Notes on September 1, 1999 immediately after the coupon is paid on that day, if the yields have not changed?
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Homework_2_solutions - UNIVERSITY OF NORTH CAROLINA AT...

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