Lyons Document Storage Corporation: Bond Accounting
Download as DOCX, PDF2 likes11,853 views
Lyons Document Storage issued $10 million in bonds in 1999 at a discount rate of 8% when market rates were 9%. As a result, the company only received around $9.1 million in proceeds. Rene Cook, the controller, must now decide whether to issue new $10 million bonds at 6% to repay the old higher interest bonds. Issuing new bonds at a lower rate could save on interest costs over the life of the bonds. However, the company would have to pay $11.52 million to repay the old bonds immediately, resulting in a one-time loss. Remaining with the existing bonds would cost more in interest payments over time. Cook determines that issuing just $11.54 million in new bonds
Lyons Document Storage Corporation: Bond Accounting
- 1. 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)
- 2. 1) A) Lyons Document Storage’s 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 “premium” or “Discount” 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” discount Bond”. When the Price of the Bond is higher than the Par Value, Then Bond is known as “Premium Bond” . 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’06) $92,31,829 $4,15,432 $96,47,261 $4,00,000 $92,47,261 02-07-2007 (Dec’07) $92,63,388 $4,16,852 $96,80,240 $4,00,000 $92,80,240
- 3. 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%. 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 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 Mill ion, 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 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
- 4. 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 ‘000 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’ Equity $2,28,430 $2,29,954 $2,29,954 $2,25,205 No Significant Change in Shareholders’ Equity Total Liabilities & Shareholders’ 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.
- 5. 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
- 6. 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 Annuit y & Single Lum p 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 Di fference need to be Paid from Company’s Reserve ( Loss f or 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 sum ( New Bond of 10Million) $97,55,928 Difference -$4,67,375 Net Saving from Issuing New Bond will be - $26,74,921 ( - $ 0.267 Million). There is not significant saving (only Loss due to the new bond).I would not Suggest going for Issuing New Bond.
- 7. 3) Assume 65 bonds could be issued and the Proceeds used to refund the existing bonds. Compare the effects of these transactions with those calculated in Q2. If you are Rene Cook, What amount of New Bonds would you recommend and why? Balance Sheet ( Liabilities & Share Holder Equity Position) ( New Bond Issue -$ 11.54 Million) 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 $11,524 $9,356 $9,316 $9,247 Due to New Bond Total Liabilities $24,519 $22,351 $22,311 $21,951 10% Change in Liabilities from Previous Year 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 $1,51,279 $1,51,279 $1,51,279 $1,46,530 Assume :a) No Change in Retained Earning Total Shareholders’ Equity $2,29,954 $2,29,954 $2,29,954 $2,25,205 No Significant Change in Shareholders’ Equity Total Liabilities & Shareholders’ Equity $2,54,473 $2,52,305 $2,52,265 $2,47,156 No Significant Change in Total Liabilities & Shareholders’ Equity. Retained Earnings will be Reduced by $ 6,92,000 in 2010 due to Coupon( Interest) Payment. If the Company Retain the Earning (assume $ 1,51,279,000). Then Final Retained Earnings will be $ 1, 50,587,000 after deducting the Interest Payment.
- 8. If Company Plan to go with issuing New Bond for $ 11.54 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 $3,46,200 $3,36,117 02-01-2010 2 $3,46,200 $3,26,327 02-07-2010 3 $3,46,200 $3,16,822 02-01-2011 4 $3,46,200 $3,07,594 02-07-2011 5 $3,46,200 $2,98,635 02-01-2012 6 $3,46,200 $2,89,937 02-07-2012 7 $3,46,200 $2,81,492 02-01-2013 8 $3,46,200 $2,73,293 02-07-2013 9 $3,46,200 $2,65,333 02-01-2014 10 $3,46,200 $2,57,605 02-07-2014 11 $3,46,200 $2,50,102 02-01-2015 12 $3,46,200 $2,42,818 02-07-2015 13 $3,46,200 $2,35,745 02-01-2016 14 $3,46,200 $2,28,879 02-07-2016 15 $3,46,200 $2,22,213 02-01-2017 16 $3,46,200 $2,15,740 02-07-2017 17 $3,46,200 $2,09,457 02-01-2018 18 $3,46,200 $2,03,356 02-07-2018 19 $3,46,200 $1,97,433 02-01-2019 20 $3,46,200 $1,91,683 02-01-2019 20 $64,43,876 Sum $69,24,000 $51,50,582 Present value of an Annuity & Single Lump Sum $1,15,94,458 All amount to the Old Investors will be Paid through Issuing New Bond for the same Value ( $ 11.54 Million) . Expense from Issuing New Bond will be $ 0. Saving from Issuing New Bond will be -$ 23,05,905 Present value of annuity & single Lump sum ( Old Bond) $92,88,553 Present value of annuity & single Lump sum ( New Bond of 10Million) $1,15,94,458 Difference -$ 23,05,905 Net Saving from Issuing New Bond will be - $23,05,905 ( - $ 0.23 Million). There is not significant saving (only Minor Loss due to the new bond).I would not Suggest going for Issuing New Bond.