Lyons Case

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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…...

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