Lyons Document Storage Corporation: Bond Math Case Solution Essay Sample
Lyon had issued long-run bonds about a decennary ago. The prevalent involvement rate at the clip of issue was higher than the current involvement rate. Therefore. the company is sing replacing its outstanding higher voucher bonds with new lower voucher bonds. The executives of the company are under the feeling that the new bonds will be good to the company because of its lower voucher payments. However. the involvement nest eggs from lower voucher are theoretically offset by the premium that might be paid for delivering the higher voucher bonds. Theoretically. the refinancing dealing should non add any value to the company. However. the dealing could hold income statement deductions. The company is expected to recognize a big loss in the twelvemonth in which the dealing occurs. while the net incomes are expected to be higher in subsequent old ages. Questions Covered
1. Explain what is meant by the footings ‘premium’ and ‘discount’ as they relate to bonds. Compute precisely how much the company received from its 8 % bonds if the rate prevailing at the clip of issue was 9 % . Besides. re-compute the sums shown in the balance sheet at December 31. 2006 and December 31. 2007. for Long-run Debt. What is the current market value of the bonds outstanding at the current effectual involvement rate of 6 % ?
2. If you were Rene Cook. would you urge publishing $ 10 million. 6 % bonds on January 2. 2009 and utilizing the returns and other hard currency to return the bing $ 10 million. 8 % bonds? Will it be more. in footings of principal and involvement payments. to maintain the bing bonds or to publish the new 1s at a lower rate? Be prepared to discourse the impact of a bond returning on the undermentioned countries: O Cash flows
o Current year’s net incomes
o Future years’ net incomes
Note: For intents of your calculations. presume that returning. if selected. occurs effectual January 2. 2009. at a monetary value of $ 1154. 15 per bond. Ignore the effects of income revenue enhancement. How many new $ 1000 bonds will Lyons hold to publish to return the old 9 % bonds?
3. Assume 6 % bonds could be issued and the returns used to return the bing bonds. Compare the effects of these minutess with those calculated in Question 2. If you were Rene Cook. what sum of new bonds would you urge and why?
Question No 2 and 3 are almsot same
