Lyons Document Storage Corporation

1) Prior to maturity, a bond may be selling at either the face value or at an amount lesser than or greater than the face value. Bonds that sell at a price greater than the face value are said to be at a premium. Discount bonds sell at a price lesser than face value. The price at issue depends on the yield required by investors and the coupon offered by the bond. If yield required is greater than coupon offered, then the bonds will have to be issued at a discount to face value. If yield required is lesser, the bonds can be issued at premium. Regardless of required yield, the bond price will approach face value as the bond approaches maturity. - Cash received by Lyons from 8% bond issue (refer excel sheet):10,000 bonds @ PV = $9,079,920.78 (40 periods, 4.5%, $400,000 payment, $10,000,000 FV) - Recomputed amounts from balance sheet for 2006, 2007: $9,258,589.55 & $9,292,611.26

Recalculating the amounts for long term debt (at 6% effective rate) shown in the balance sheet 2007($) Bonds Payable Less: premium 10,000,000 2006($) 10,000,000 1,741,314,77 11,741,314,77

Unamortized 1,644,360.84 11,644,360.84

Carrying Value

Current market value of bonds outstanding at current interest rate of 6%: $ 11,541,502.41 (10000 bonds) in Dec 2008. This assumed that yield demanded was 9% annually till 2008 and will remain at 6% p.a from 2008 to 2019.

2) If Lyons issues new bonds at 6% coupon, each bond would fetch $1000. So, to refinance the old debt, which means buying the old bonds off the market, Lyons would have to issue 10000 new bonds to raise $10,000,000. This would require them to spend at least $1.54 million out of its own pocket. From a balance sheet perspective, current year earnings would decrease by $2.24 million. But future year earnings would increase by $200,000 per annum till Jan 2019. Also, in the new scheme, number of interest payments would also reduce by 1 (Jul 2019 coupon payment need not be paid), thus saving $400,000 for that period. From Ques2 Worksheet Saving in Principle by issuing new bonds = $-161,264.78 (loss) Saving in Interest payments = $1,702,767.20 To refund the old bonds entirely by issue of new bonds, Lyons has to issue 11542 bonds with 6% coupon rate paid semi-annually.

3) From an accounting perspective, keeping the time value of money in mind, there is no difference in the PV of the 2nd options. It is upto Rene Cook or the firms ideology to decide what option to go for. If we had to make a decision on behalf of Rene Cook, we would not go ahead with the new proposed bond restructuring because that would imply upfront payment, which would reflect badly in the current years Balance Sheet, which is something Mr. Lyons is not fond of. In addition, it would be difficult to explain the $2.24 million loss in the P&L to the board and they would not be able to recover it with the issue of new bonds.