Lyons Document Storage Corporation Bond Math Case Solution

Case Solution

When students hold the British-language PDF from the Brief Case in the course pack, they'll may also buy a sound version. Last Year a present MBA course must assess the potential refunding of bonds launched in 2000 when interest levels were much greater. They have to consider the potential results of repurchasing company bonds outstanding using cash that may be acquired by providing new bonds inside a lower interest rate. Students have to perform a quantitative assignment.

Excel Calculations

Value of Bonds

At bond issue (1999),     At January 2009,

Face Value ($), Coupon Rate, Coupon Payment (semi-annual), Interest Rate (YTM), Maturity (years), Value of Bond

Balance Sheet Loan Balance Calculation

Beginning Loan Balance, Interest Due, Interest Paid, Amortized Interest, Ending Loan BalanceDifference between 6% and 8% bonds

Questions Covered

1. Explain what is meant by the terms ‘premium’ and ‘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 issue was 9%. 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%?

2. 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 the new ones at a lower rate? Be prepared to discuss the impact of a bond refunding on the following areas:

o Cash flows

o Current year’s earnings

o Future years’ earnings

Note: For purposes of your computations, assume that refunding, if selected, occurs effective January 2, 2009, at a price of $1154.15 per bond. Ignore the effects of income tax. How many new $1000 bonds will Lyons have to issue to refund the old 9% bonds?

3. 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?

Question No 2 and 3 are almsot same