Lyonscasesolution 141026100118 Conversion Gate02

Lake Pushkar

Lyons Document Storage Corporation:

Bond Accounting

By

S.Vijay Ganesh (WPM 15 VIJ)

Malikaa (WPM15MAL)

Sriram Ramakrishnan ( WPM 15 SRI)

Mahesh Gurumoorthy( WPM 15 MAH)

1) A) Lyons Document Storage’s Controller, eric Petro told the Rene that

bonds were issued in 1999 at a discount and that only approximately $ 9.1

Million was received in Case. Explain what is meant by the term “premium” or

“Discount” as they relate to bonds.

Analysis: Lyons Document Storage Issued the bond for $ 10 Million with the Par

Value of $ 1000, Coupon Rate of 8% in 1999, during that Period Investors was

demanding 9%. Hence Investors were bid only for $ 908.24. Bond was sold at $

908.24 against the par value of $ 1000. Hence it is known as” discount Bond”.

When the Price of the Bond is higher than the Par Value, Then Bond is known as

“Premium Bond”. Premium Bond or Discount Bond Occurs only when there is

difference arises between Coupon Rate & Market Interest Rate (expected Rate).

Regardless of the Market Interest Rate, Bond Price will reach the Par value of the

Bond when it reaches the Maturity Period.

Par Value $ 1000Coupon Rate 8%Maturity 20 YearsRequired rate 9%Coupon Payment $ 80

PVIFA(9%, 20 Years) $ 730.24PVIF( 9%, 20 Years) $ 178Bond Price $ 908.24Total Bond Amount Collected (10,000 Bonds) $ 9.1 Million

b) Compute exactly how much the company received from its 8% bonds if the

rate prevailing at the time of Original Issue was 9% as indicated in Exhibit 2.

Year

Liability at the Beginning of Period

Interest at 4.5% (semi annually)

Liability at the end of Period before Payment Payment

Liability at the end of Period

02-07-2006 (Dec’06) $92,31,829 $4,15,432 $96,47,261

$4,00,000

$92,47,261

02-07-2007(Dec’07) $92,63,388 $4,16,852 $96,80,240

$4,00,000

$92,80,240

C) The recomputed amount in the balance sheet in December, 2006 and

December, 2007 are $ 92, 47,261 and $ 92, 80,240.

D) Current market Value of the bonds outstanding at the current effective

Interest rate of 6%.

2) If you were Rene Cook, Would you recommend issuing $ 10 Million, 6% Bonds

on

Jan 2, 2009 and using the Proceeds and Other Cash to Refund the existing $ 10

Million, 8% Bonds? Will it cost more in terms of Principal and Interest Payments,

to keep the existing bonds or to Issue New Ones at a Lower Rate? Be prepared to

discuss the Impact of a Bond Refunding on the Following Areas like Cash Flow ,

Current Year Earnings, Future Year Earnings.

New Bond Issuing:

By Issuing New Bond, Company can collect $ 10 Million. To Repay Old bond,

Company has to pay $ 11.52 Million. Difference amount of $ 1.52 need to be paid

from Retained Earnings. This is additional Expense for the Company.

Balance Sheet ( Liabilities & Share Holder Equity Position) ( Issuing New Bond for $ 10 Million)Units in ‘000


PVIFA(6%, 10.5 Years) $ 609.88PVIF( 6%, 10.5 Years) $ 542.50Bond Price $ 1152.40Total Bond Amount Collected (10,000 Bonds) $ 11.52 Million


PVIFA(6%, 10.5 Years) $ 442PVIF( 6%, 10.5 Years) $ 558.Bond Price $ 1000.00Total Bond Amount Collected (10,000 Bonds) $ 10 Million

Particulars 2009 2008 2007 2006 Remarks

T.Current Liabilities $12,995 $12,995 $12,995 $12,704

Assume: No Change in Current Liabilities

Long Term Debt $10,000 $9,356 $9,316 $9,247 Due to New Bond

Total Liabilities $22,995 $22,351 $22,311 $21,951

No Significant Change in in Liabilities

Share holder Equity

Common Shares $2,838 $2,838 $2,838 $2,838

Additional Paid In Capital $75,837 $75,837 $75,837 $75,837

Retained Earning $1,49,755 $1,51,279 $1,51,279 $1,46,530

Assume :a) No Change in Retained Earningb) 1523.8 (in Thousand paid to Old Bond Investors)

Total Shareholders’ Equity $2,28,430 $2,29,954 $2,29,954 $2,25,205

No Significant Change in Shareholders’ Equity

Total Liabilities & Shareholders’ Equity $2,51,425 $2,52,305 $2,52,265 $2,47,156

Retained Earnings will be Reduced by $ 6,00,000 in 2010 due to Coupon( Interest)

Payment. If the Company Retain the Earning (assume $ 1,49,755,000). Then Final

Retained Earnings will be $ 1, 49,155,000 after deducting the Interest Payment.

If Company Stick to Ongoing Bond (Cash Flow will be as below). Present value

of annuity & Lump Sum amount is calculated below

YearNo of Payment

Coupon Payment (semi annually)

Present Value of Payment (Dis.rate 3% semi Annually)

Present Value of Final Settlement

02-07-2009 1 $4,00,000

$3,88,350

02-01-2010 2 $4,00,000

$3,77,038

02-07-2010 3 $4,00,000

$3,66,057

02-01-2011 4 $4,00,000

$3,55,395

02-07-2011 5 $4,00,000

$3,45,044

02-01-2012 6 $4,00,000

$3,34,994

02-07-2012 7 $4,00,000

$3,25,237

02-01-2013 8 $4,00,000

$3,15,764

02-07-2013 9 $4,00,000

$3,06,567

02-01-2014 10 $4,00,000

$2,97,638

02-07-2014 11 $4,00,000

$2,88,969

02-01-2015 12 $4,00,000

$2,80,552

02-07-2015 13 $4,00,000

$2,72,381

02-01-2016 14 $4,00,000

$2,64,447

02-07-2016 15 $4,00,000

$2,56,745

02-01-2017 16 $4,00,000

$2,49,267

02-07-2017 17 $4,00,000

$2,42,007

02-01-2018 18 $4,00,000

$2,34,958

02-07-2018 19 $4,00,000

$2,28,114

02-01-2019 20 $4,00,000

$2,21,470

02-07-2019 21 $4,00,000

$2,15,020

02-07-2019 21 $31,22,544

Sum $84,00,000 $61,66,010

Present value of an Annuity & Single Lump Sum $92,88,553

If Company Plan to go with issuing New Bond for $ 10 Million , Coupon rate 6%,

Market Expected rate is 6% (Cash Flow will be as below). Present value of

annuity & Lump Sum amount is calculated below

YearNo of Payment

Coupon Payment



02-07-2009 1 $3,00,000 $2,91,262

02-01-2010 2 $3,00,000 $2,82,779

02-07-2010 3 $3,00,000 $2,74,542

02-01-2011 4 $3,00,000 $2,66,546

02-07-2011 5 $3,00,000 $2,58,783

02-01-2012 6 $3,00,000 $2,51,245

02-07-2012 7 $3,00,000 $2,43,927

02-01-2013 8 $3,00,000 $2,36,823

02-07-2013 9 $3,00,000 $2,29,925

02-01-2014 10 $3,00,000 $2,23,228

02-07-2014 11 $3,00,000 $2,16,726

02-01-2015 12 $3,00,000 $2,10,414

02-07-2015 13 $3,00,000 $2,04,285

02-01-2016 14 $3,00,000 $1,98,335

02-07-2016 15 $3,00,000 $1,92,559

02-01-2017 16 $3,00,000 $1,86,950

02-07-2017 17 $3,00,000 $1,81,505

02-01-2018 18 $3,00,000 $1,76,218

02-07-2018 19 $3,00,000 $1,71,086

02-01-2019 20 $3,00,000 $1,66,103

02-01-2019 20 $55,83,948

Sum $57,00,000 $41,71,980

Present value of an Annuity & Single Lump Sum

$97,55,92

8

Expense from Issuing New Bond will be $ 22,07,546

Market Price of Old Bond $1,15,23,800Liability at the end of 2008 $93,16,254

Difference- $22,07,54

6 Difference need to be Paid from Company’s Reserve ( Loss for Company).

Saving from Issuing New Bond will be -$4,67,375

Present value of annuity & single Lump sum ( Old Bond) $92,88,553Present value of annuity & single Lump sum ( New Bond of 10Million) $97,55,928

Difference -$4,67,375 Net Saving from Issuing New Bond will be - $26,74,921 ( - $ 0.267 Million).

There is not significant saving (only Loss due to the new bond).I would not

Suggest going for Issuing New Bond.

3) Assume 65 bonds could be issued and the Proceeds used to refund the

existing bonds. Compare the effects of these transactions with those calculated

in Q2. If you are Rene Cook, What amount of New Bonds would you recommend

and why?

Balance Sheet ( Liabilities & Share Holder Equity Position) ( New Bond Issue -$ 11.54 Million) Particulars 2009 2008 2007 2006 Remarks

T.Current Liabilities $12,995 $12,995 $12,995 $12,704Assume: No Change in Current Liabilities

Long Term Debt $11,524 $9,356 $9,316 $9,247 Due to New Bond

Total Liabilities $24,519 $22,351 $22,311 $21,95110% Change in Liabilities from Previous Year

Share holder Equity

Common Shares $2,838 $2,838 $2,838 $2,838

Additional Paid In Capital $75,837 $75,837 $75,837 $75,837

Retained Earning $1,51,279 $1,51,279 $1,51,279 $1,46,530Assume :a) No Change in Retained Earning

Total Shareholders’ Equity $2,29,954 $2,29,954 $2,29,954 $2,25,205

No Significant Change in Shareholders’ Equity

Total Liabilities & Shareholders’ Equity $2,54,473 $2,52,305 $2,52,265 $2,47,156

No Significant Change in Total Liabilities & Shareholders’ Equity.

Retained Earnings will be Reduced by $ 6,92,000 in 2010 due to Coupon( Interest)

Payment. If the Company Retain the Earning (assume $ 1,51,279,000). Then Final

Retained Earnings will be $ 1, 50,587,000 after deducting the Interest Payment.

If Company Plan to go with issuing New Bond for $ 11.54 Million , Coupon rate

6%, Market Expected rate is 6% (Cash Flow will be as below). Present value of

annuity & Lump Sum amount is calculated below

YearNo of Payment

Coupon Payment



02-07-2009 1 $3,46,200 $3,36,117

02-01-2010 2 $3,46,200 $3,26,327

02-07-2010 3 $3,46,200 $3,16,822

02-01-2011 4 $3,46,200 $3,07,594

02-07-2011 5 $3,46,200 $2,98,635

02-01-2012 6 $3,46,200 $2,89,937

02-07-2012 7 $3,46,200 $2,81,492

02-01-2013 8 $3,46,200 $2,73,293

02-07-2013 9 $3,46,200 $2,65,333

02-01-2014 10 $3,46,200 $2,57,605

02-07-2014 11 $3,46,200 $2,50,102

02-01-2015 12 $3,46,200 $2,42,818

02-07-2015 13 $3,46,200 $2,35,745

02-01-2016 14 $3,46,200 $2,28,879

02-07-2016 15 $3,46,200 $2,22,213

02-01-2017 16 $3,46,200 $2,15,740

02-07-2017 17 $3,46,200 $2,09,457

02-01-2018 18 $3,46,200 $2,03,356

02-07-2018 19 $3,46,200 $1,97,433

02-01-2019 20 $3,46,200 $1,91,683

02-01-2019 20 $64,43,876

Sum $69,24,000 $51,50,582

Present value of an Annuity & Single Lump Sum$1,15,94,458

All amount to the Old Investors will be Paid through Issuing New Bond for

the same Value ( $ 11.54 Million) . Expense from Issuing New Bond will be $ 0.

Saving from Issuing New Bond will be -$ 23,05,905

Present value of annuity & single Lump sum ( Old Bond) $92,88,553Present value of annuity & single Lump sum ( New Bond of 10Million)

$1,15,94,458

Difference-$ 23,05,905

Net Saving from Issuing New Bond will be - $23,05,905 ( - $ 0.23 Million).

There is not significant saving (only Minor Loss due to the new bond).I would not

Suggest going for Issuing New Bond.

Documents

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