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# lyonscasesolution-141026100118-conversion-gate02 (1)

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```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\u2019s 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 \u201cpremium\u201d or \u201cDiscount\u201d 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\u201d discount Bond\u201d. When the Price of the Bond is
higher than the Par Value, Then Bond is known as \u201cPremium Bond\u201d . 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.
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.

Par Value \$ 1000
Coupon Rate 8%
Maturity 20 Years
Required rate 9%
Coupon Payment \$ 80
PVIFA(9%, 20 Years) \$ 730.24
PVIF( 9%, 20 Years) \$ 178
Bond Price \$ 908.24
Total Bond Amount Collected (10,000 Bonds) \$ 9.1 Million
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\u201906) \$92,31,829 \$4,15,432 \$96,47,261 \$4,00,000 \$92,47,261
02-07-2007
(Dec\u201907) \$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:

Par Value \$ 1000
Coupon Rate 8%
Maturity 20 Years
Required rate 6%
Coupon Payment \$ 80
PVIFA(6%, 10.5 Years) \$ 609.88
PVIF( 6%, 10.5 Years) \$ 542.50
Bond Price \$ 1152.40
Total Bond Amount Collected (10,000 Bonds) \$ 11.52 Million
Par Value \$ 1000
Coupon Rate 6%
Maturity 10 Years
Required rate 6%
Coupon Payment \$ 60
PVIFA(6%, 10.5 Years) \$ 442
PVIF( 6%, 10.5 Years) \$ 558.
Bond Price \$ 1000.00
Total Bond Amount Collected (10,000 Bonds) \$ 10 Million
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 \u2018000
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
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 Earning
b) 1523.8 (in Thousand paid
to Old Bond Investors)
Total
Shareholders\u2019
Equity \$2,28,430 \$2,29,954 \$2,29,954 \$2,25,205
No Significant Change in
Shareholders\u2019 Equity

Total Liabilities
& Shareholders\u2019
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
Year No 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
Year
No of
Payment
Coupon
Payment
Present Value of
Payment (Dis.rate
3% semi Annually)
Present Value
of Final
Settlement
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 \$97,55,928
Expense from Issuing New Bond will be \$ 22,07,546
Market Price of Old Bond \$1,15,23,800
Liability at the end of 2008 \$93,16,254
Difference - \$22,07,546
Difference need to be Paid from Company\u2019s Reserve ( Loss for Company).
Saving from Issuing New Bond will be -\$4,67,375
Present value of annuity & single Lump sum ( Old Bond) \$92,88,553
Present value of annuity & single Lump```