7/14/2019 LYons Bond Case Solution

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8% Bond 6% Bond

Bond Issue 10,000,000 Bond Issue 10,000,000 11,541,500 

Face Value 1,000 Face Value 1,000 1,000 

Number of Bonds 10,000 Number of Bonds 10,000 11,542 

Coupon Rate 8% Coupon Rate 6% 6%

Market yield 9% 6% Market yield 6% 6%

Semi - Annual coupon payment 400,000 Semi - Annual coupon payment 300,000 346,245 

Period till maturity (No of Semi- annual) 40 Period till maturity (No of Semi- annual) 20 20 

Proceed from Issue (Q1, Part B) Part A Premium & Discount as it relates to Bonds

PV of Interest payments $9,079,921

When Market Value of bond is more than its par value then bond is said to be trading at premium.

This happens when the coupon rate is more than the market rate of interest. When Market value of 

bond is less than its par value then bond is said to be trading at discount. This happens when the

coupon rate is less than the market rate of interest. An issuer has to amortize the discount or

premium over the life of the bond.

No of Coupon payment made till 31 Dec 2006 15 Part B Proceeds from issue 9,079,921 

No of Coupon payment made till 31 Dec 2007 17

PV of bond payable (Q1, Part C) Part C Re-compute amount shown in BS

- on 31st Dec 2006 $9,258,590 31st Dec 2006 9,258,590 

- on 31st Dec 2007 9,292,611 31st Dec 2007 9,292,611 Note - The last coupon payment due on 2nd Jan has been transferred to Current liability and hence "# of coupon

payments made" has been increased by 1 in both cases.

MV of bond payable (Q1, Part D)

Part D Current MV 11,541,502 

No of Coupon payment remaining 31 Dec 2008 21

Note - The last coupon payment due on 2nd Jan has been transferred to Current liability and hence "No of coupon

payments remaining" has been increased by 1.

PV of future cash flow at 6% discount $11,541,502

Repurchase price of 8% Bond 1,154 

Number of Bonds 10,000 

Amount 11,541,500  Part A Cash Flows

Proceed from fresh 6% Bond issue 10,000,000 

In case of repurchase of bond - Additional Cash outflow of $ 1,541,500 in current year. For following

year interest saving or less cash outflow of $ 200,000 every year. Principal payment will be advanced

by six months in 2019 and resultant saving in interest obligation of $ 400,000

Cash from own account (Q2, Part A) 1,541,500 

Question 1

Question 2

7/14/2019 LYons Bond Case Solution

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Part B Current year earning

PV of bond payable Current year earning will fall by $ 2,211,736 ($ 2.24 mn) on account of loss on re-purchase of bond.

No of Coupon payment made till 31 Dec 2008 19

Note - The amount of loss given in question is $ 2.24 million, which is calculated as the difference between currentMV and book value as on 31 Dec 2007. In our calculation we have adjusted for interest accrual and payment in

June 2008 and restatement to current liability of interest due on 2nd Jan 2009.

- on 31st Dec 2008 9,329,764 

Part C Future year earning

Loss on retirement of bonds (Q2, Part B) 2,211,736 

In case of re-issue of bond interest expense will be reduced by $ 100,000 every semi-annual or $

200,000 every year. Also there will be one less interest payment in case of re-issue

100% of funding from bond issue 11,541,500 

Par value 1,000  Part D New Bond Issue 11,542 Numbers of bonds 11,542 

Better Option - 8% Bond or 6% Bond (Solution 3)

8% Bond

As seen the Pv of cash outflow from current 8% bond is same as in case of issue of 6% bond. Hence

Lyons Document storage Corp should be indifferent under both decisions.

PV of Cash outflow in case of 8% bond 11,541,502 

As re-purchase of bond will lead to loss of $ 2.24 million in current year without any real net benefit,

it is not worthwhile to re-purchase the bond.

Further if only $10 million worth of bonds are issued, it would lead to negative cash flow of $ 1.54

million in current year.

6% Bond Based on above we recommend not to retire old bond.

In case $ 10 million bond issued + Cash funding

PV of Cash outflow in case of 6% bond 10,000,000 

Pv of Cash funding 1,541,500 

11,541,500 

In case entire funding from bond issue 11,541,500 

Difference in two cash outflows 0 

Solution 3