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.
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
six months (March and September) until September of 2007 at which time
the face value of $1000 becomes due.
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