Professional Documents
Culture Documents
Corporate Finance
Corporate
Finance
Group
Case
Submission
Lyons
Document
Storage
Corporation
Submitted
by:
Group
E11
Section
E
Priyabrata
Bisoi
(0249/49)
Rahul
Deb
(0254/49)
Rahul
Gautam
(0255/49)
Satish
Kumar
(0301/49)
Page
IIMC
Corporate Finance
Q1
Page
Lyons
Document
Storages
controller,
Eric
Petro,
told
Rene
that
the
bonds
were
issued
in
1999
at
a
discount
and
that
only
approximately
$
9.1
million
was
received
in
cash.
Explain
what
is
meant
by
the
terms
premium
or
discount
as
they
relate
to
bonds.
Compute
exactly
how
much
the
company
received
from
its
8%
bonds
if
the
rate
prevailing
at
the
time
of
the
original
issue
was
9%
as
indicated
in
Exhibit
2.
Also
re-compute
the
amounts
shown
in
the
balance
sheet
at
December
31,
2006
and
December
31,
2007,
for
Long-Term
Debt.
What
is
the
current
market
value
of
the
bonds
outstanding
at
the
current
effective
interest
rate
of
6%?
Premium
and
discount
are
terms
referring
to
the
difference
in
face
value
of
the
bond
and
the
amount
received
by
the
borrower
at
the
time
of
issue.
Bonds
selling
at
a
price
greater
than
face
value
is
said
to
be
at
a
premium
and
the
difference
is
called
premium.
If
market
rate
of
interest
is
less
than
coupon
rate,
the
bond
can
be
issued
at
a
premium.
Bonds
selling
at
a
price
lesser
than
face
value
is
said
to
be
at
a
discount
and
the
difference
is
called
discount.
If
market
rate
of
interest
is
greater
than
coupon
rate,
the
bond
can
be
issued
at
a
discount.
The
market
rate
at
the
time
of
issue
was
9%,
and
the
bond
coupon
rate
was
8%
paid
semi-annually(semi-annual
payments
of
$4,00,000)Cash
amount
received
by
Lyons
at
the
time
of
issue
is
calculated
by
NPV(excel
formula)
using
parameters
4.5%(rate),
40
coupon
payments
of
400000
each
and
10000000(
face
value)
.
The
output
comes
out
to
be
$
90,79,920.78
which
is
the
amount
received
by
Lyons
Corp
at
the
time
of
bond
issue
Liability
at
Liability
at
end
of
Liability
at
end
of
Payment
Semi-Annual
Payment
beginning
of
period
before
period
after
Date
Interest
period
payment
payment
02/01/00
400000
$
90,79,920.78
$
4,08,596.44
$
94,88,517.21
$90,88,517.21
02/07/00
400000
$
90,88,517.21
$
4,08,983.27
$
94,97,500.49
$90,97,500.49
02/01/01
400000
$
90,97,500.49
$
4,09,387.52
$
95,06,888.01
$91,06,888.01
02/07/01
400000
$
91,06,888.01
$
4,09,809.96
$
95,16,697.97
$91,16,697.97
02/01/02
400000
$
91,16,697.97
$
4,10,251.41
$
95,26,949.38
$91,26,949.38
02/07/02
400000
$
91,26,949.38
$
4,10,712.72
$
95,37,662.10
$91,37,662.10
02/01/03
400000
$
91,37,662.10
$
4,11,194.79
$
95,48,856.90
$91,48,856.90
02/07/03
400000
$
91,48,856.90
$
4,11,698.56
$
95,60,555.46
$91,60,555.46
02/01/04
400000
$
91,60,555.46
$
4,12,225.00
$
95,72,780.45
$91,72,780.45
02/07/04
400000
$
91,72,780.45
$
4,12,775.12
$
95,85,555.57
$91,85,555.57
02/01/05
400000
$
91,85,555.57
$
4,13,350.00
$
95,98,905.57
$91,98,905.57
02/07/05
400000
$
91,98,905.57
$
4,13,950.75
$
96,12,856.32
$92,12,856.32
02/01/06
400000
$
92,12,856.32
$
4,14,578.53
$
96,27,434.86
$92,27,434.86
02/07/06
400000
$
92,27,434.86
$
4,15,234.57
$
96,42,669.43
$92,42,669.43
02/01/07
400000
$
92,42,669.43
$
4,15,920.12
$
96,58,589.55
$92,58,589.55
Group Case Submission Term III
IIMC
Corporate Finance
$
92,58,589.55
$
92,75,226.08
$
92,92,611.26
$
93,10,778.76
$
93,29,763.81
$
93,49,603.18
$
93,70,335.32
$
93,92,000.41
$
94,14,640.43
$
94,38,299.25
$
94,63,022.71
$
94,88,858.74
$
95,15,857.38
$
95,44,070.96
$
95,73,554.15
$
96,04,364.09
$
96,36,560.48
$
96,70,205.70
$
97,05,364.95
$
97,42,106.38
$
97,80,501.16
$
98,20,623.72
$
98,62,551.78
$
99,06,366.61
$
99,52,153.11
$
4,16,636.53
$
4,17,385.17
$
4,18,167.51
$
4,18,985.04
$
4,19,839.37
$
4,20,732.14
$
4,21,665.09
$
4,22,640.02
$
4,23,658.82
$
4,24,723.47
$
4,25,836.02
$
4,26,998.64
$
4,28,213.58
$
4,29,483.19
$
4,30,809.94
$
4,32,196.38
$
4,33,645.22
$
4,35,159.26
$
4,36,741.42
$
4,38,394.79
$
4,40,122.55
$
4,41,928.07
$
4,43,814.83
$
4,45,786.50
$
4,47,846.89
$
96,75,226.08
$
96,92,611.26
$
97,10,778.76
$
97,29,763.81
$
97,49,603.18
$
97,70,335.32
$
97,92,000.41
$
98,14,640.43
$
98,38,299.25
$
98,63,022.71
$
98,88,858.74
$
99,15,857.38
$
99,44,070.96
$
99,73,554.15
$
1,00,04,364.09
$
1,00,36,560.48
$
1,00,70,205.70
$
1,01,05,364.95
$
1,01,42,106.38
$
1,01,80,501.16
$
1,02,20,623.72
$
1,02,62,551.78
$
1,03,06,366.61
$
1,03,52,153.11
$
1,04,00,000.00
$92,75,226.08
$92,92,611.26
$93,10,778.76
$93,29,763.81
$93,49,603.18
$93,70,335.32
$93,92,000.41
$94,14,640.43
$94,38,299.25
$94,63,022.71
$94,88,858.74
$95,15,857.38
$95,44,070.96
$95,73,554.15
$96,04,364.09
$96,36,560.48
$96,70,205.70
$97,05,364.95
$97,42,106.38
$97,80,501.16
$98,20,623.72
$98,62,551.78
$99,06,366.61
$99,52,153.11
$0.00
Using
the
above
table,
we
can
compute
the
long-term
debt
at
the
end
of
each
period.
Balance
sheet
for
Long
term
debt
at
December
31st
2006
=
$92,58,589.55
Balance
sheet
for
Long
term
debt
at
December
31st
2007=
$92,92,611.26
Current
market
value
of
bonds
at
6%
market
rate
is
$1,15,41,502.41(approx.
$11.54
million)
Note:
Above
value
found
by
the
excel
formula
PV
using
parameters
3%(rate),
21
(number
of
periods),
400000
(coupon
payment),
10000000
(face
value)
IIMC
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
400000
10400000
Page
02/07/07
02/01/08
02/07/08
02/01/09
02/07/09
02/01/10
02/07/10
02/01/11
02/07/11
02/01/12
02/07/12
02/01/13
02/07/13
02/01/14
02/07/14
02/01/15
02/07/15
02/01/16
02/07/16
02/01/17
02/07/17
02/01/18
02/07/18
02/01/19
02/07/19
Corporate Finance
Q2
IIMC
Page
If
you
were
Rene
Cook,
would
you
recommend
issuing
$10
million,
6%
bonds
on
January
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:
Cash
flows
Current
years
earnings
Future
years
earnings
Note:
For
purpose
of
your
computations,
assume
that
refunding,
if
selected,
occurs
effective
January
2,
2009,
at
a
price
of
$1,154.15
per
bond.
Ignore
the
effects
of
income
taxes.
How
many
new
$1,000
bonds
will
Lyons
have
to
issue
to
refund
the
old
9%
bonds?
The
current
market
price
of
8%
bonds
is
$1,154.15
per
bond.
Cook
needs
$11.54
million
(1,154.15*10000)
for
retirement
of
old
bonds.
As
the
coupon
rate
is
same
as
the
current
market
rate
(6%)
so
each
new
bond
will
fetch
$
1000.
$10
million
will
be
available
from
the
issuance
of
10,000
new
bonds.
This
would
require
them
to
spend
$1.54
million
($1541502.41)
from
their
own
pocket.
The
impact
of
bond
refunding
on
below
three
areas
is
Cash
Flows:
Cook
(Lyons)
has
to
spend
$
1.54
million
from
its
own
pocket.
However
in
later
periods,
cash
flow
will
improve,
as
it
will
have
to
pay
$1,00,000
less
every
period
(6
months)
for
20
periods
due
to
lower
coupon
rate.
It
will
also
be
paying
interest
for
one
less
period.
Current
Years
earnings:
It
will
show
an
outflow
of
$
2.24
million
as
current
liability
was
$
9.3
million
and
the
old
bond
were
retired
at
$
11.54
million
(current
market
value)
Future
years
earnings:
It
will
pay
$
100,000
less
for
the
next
20
periods
(1
period=
6
months)
and
1
interest
payment
less.
So
the
future
earnings
will
improve.
From
calculations
in
excel
sheet
we
found
out
Saving
in
Principal
by
issue
of
new
bonds
=
[10000000/
(1.03^21)]
-
[10000000/
(1.03^20)]
=
-$
1,61,264.783
Saving
in
Interest
payments
by
issue
of
new
bonds
=
$
17,02,767.20
Sum
of
the
above
two
equals
the
extra
amount
it
has
to
pay
now
to
retire
old
bonds.
Taking
into
account,
Time
Value
of
Money
there
is
no
difference
in
the
PV
of
both
options.
So
from
accounting
standpoint,
Cook
can
go
ahead
with
either
of
the
two
options.
To
retire
the
old
bonds
entirely
by
issuing
new
bonds,
they
have
to
issue
11542
new
bonds
(worth
$
11.54
million)
with
6%
coupon
rate
paid
semi-annually.
Corporate Finance
Q3
Assume
6%
bonds
could
be
issued
and
the
proceeds
used
to
refund
the
existing
bonds.
Compare
the
effects
of
these
transactions
with
those
calculated
in
Question
2.
If
you
were
Rene
Cook,
what
amount
of
new
bonds
would
you
recommend
and
why?
The
two
options
found
from
Q
2
are
i)
ii)
Issuing
10,000
new
bonds
and
paying
the
remaining
amount
from
own
pocket
Issuing
11,542
new
bonds
to
entirely
finance,
retirement
of
old
bonds.
Since
there
is
no
difference
in
the
PV
of
either
alternative,
from
an
accounting
perspective,
Cook
could
be
indifferent
between
either
of
the
alternatives.
Option
(i)
requires
a
outflow
of
$
1.54
million
and
will
reflect
a
huge
loss
of
$
2.24
million
in
the
current
year,
which
would
be
difficult
to
explain
to
the
shareholders.
Since
David
Lyons
wouldnt
be
happy
with
low
earnings
and
shrinking
growth
rate
so
the
above
option
was
undesirable.
Page
Since
David
Lyons
was
interested
in
replacing
8
%
bonds
with
bonds
having
lower
interest
rates,
therefore
Cook
should
issue
11,542
new
bonds
to
fully
finance
refunding
of
old
bonds.
IIMC