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preferred stocks and the market yield on the most junior
subordinated debt of the issuers of that preferred stock because
the corporate bond market was more active.
Goldman Sachs decided that the market required a yield on
PIK preferred stock that was 3 to 4 percentage points higher than
the yield required on the most junior subordinated debt of the
issuer of the preferred stock. To approximate the yield that an
investor would have required to acquire subordinated debt of
HealthTrust, Goldman Sachs first estimated that HealthTrust
subordinated debt would receive a low single B rating and would
have a market yield of 15 percent.13 Consequently, Goldman Sachs
concluded that an investor in HealthTrust PIK preferred stock
would have required a yield of 18 to 19 percent.
Goldman Sachs then discounted the scheduled cash flows on
the class A preferred stock and class B preferred stock, using
the estimated required yield for the PIK Preferred Stock, to
determine fair market value of the Preferred Stock as of
September 17, 1987. For that purpose, Goldman Sachs assumed that
the class A preferred stock would pay dividends at a 14-percent
rate (the actual rate for the initial dividend period) and that
the class B preferred stock would pay dividends at a 12.5-percent
13 During June 1988, HealthTrust issued subordinated debt that
received credit ratings of B3/CCC+ and that bore a market yield
of 15-1/4 percent.
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