lyonscasesolution-141026100118-conversion-gate02 (1)
9 pág.

lyonscasesolution-141026100118-conversion-gate02 (1)


DisciplinaMatemática Financeira48.162 materiais1.354.580 seguidores
Pré-visualização2 páginas
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 
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 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