Lyon Document Storage

Corporation
Corporate Finance Case Submission

Name
Viral Jansari
Trisha Jhaveri
Siddharth
Bhattbhatt
Vishwas Jajodia

Group

Reg.
No.
0444/5
2
0418/5
2
0383/5
2
0447/5
2

Mobile

Email ID

83358478
29
83350744
18
83369473
83
99909026
95

viralj2017@email.iimcal.ac.in
trishaaj2017@email.iimcal.ac.
in
siddharthsb2017@email.iimc
al.ac.in
vishwasj2017@email.iimcal.a
c.in

I.
The term premium refers to the extra amount above the par value of
the bond which the investor pays to buy the bond. This happens when the
bond offers a coupon greater than the market interest rate. Because of
this difference, present value of the cash-flows from the bond exceeds the
face value of the bond and this excess is called the premium for the
bond.
Similarly, the term discount refers to the amount below the par value of
the bond which the investor keeps with himself in exchange for the bond.
This happens when the bond offers a coupon lesser than the market
interest rate. Because of this difference, present value of the cash-flows
from the bond falls short of the face value of the bond and this difference
is called the discount for the bond.
The company received $9,079,921 for its 8% bonds in July 1999. Amount
shown in Balance Sheet in 2006 and 2007 (December) is $9,258,589.55
and $9,292,611.26 respectively.
Maturity
Issue
Date
FV

Yea
r
19
99
20
00

20
01

20
02

20
03

20
04

Coupon
Rate
Periods
Carrying
Market
Value
Rate
$9,079,920.78
Bond
Price
$9,088,517.21

$9,097,500.49

$9,106,888.01

$9,116,697.97

$9,126,949.38

$9,137,662.10

$9,148,856.90

$9,160,555.46

10

$9,172,780.45

Ter
m
1

2-Jul-19
2-Jul-99
$
10,000,000.0
0
8%
2
Interest
9%

Coupon

$408,596 $400,000
$9,079,920.7
.44
.00
8
$408,983 $400,000
.27
.00
$409,387 $400,000
.52
.00
$409,809 $400,000
.96
.00
$410,251 $400,000
.41
.00
$410,712 $400,000
.72
.00
$411,194 $400,000
.79
.00
$411,698 $400,000
.56
.00
$412,225 $400,000
.00
.00
$412,775 $400,000
.12
.00

Liability
$9,088,517.
21
$9,097,500.
49
$9,106,888.
01
$9,116,697.
97
$9,126,949.
38
$9,137,662.
10
$9,148,856.
90
$9,160,555.
46
$9,172,780.
45
$9,185,555.
57

20
05

20
06

20
07

20
08

20
09

11

$9,185,555.57

12

$9,198,905.57

13

$9,212,856.32

14

$9,227,434.86

15

$9,242,669.43

16

$9,258,589.55

17

$9,275,226.08

18

$9,292,611.26

19

$9,310,778.76

20

$9,329,763.81

$413,350
.00
$413,950
.75
$414,578
.53
$415,234
.57
$415,920
.12
$416,636
.53
$417,385
.17
$418,167
.51
$418,985
.04
$419,839
.37

$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00
$400,000
.00

$9,198,905.
57
$9,212,856.
32
$9,227,434.
86
$9,242,669.
43
$9,258,589.
55
$9,275,226.
08
$9,292,611.
26
$9,310,778.
76
$9,329,763.
81
$9,349,603.
18

Current Market Value of the bond outstanding at the current effective rate
of 6% is $11,541,502.41

Yea Ter Carrying

Interest
Coupon
Liability
r
m
Value
20
20
$11,541,50 $346,245. $400,000
$11,487,74
09
2.41
07
.00
7.49
21
$11,487,74 $344,632. $400,000
$11,432,37
7.49
42
.00
9.91
20
22
$11,432,37 $342,971. $400,000
$11,375,35
10
9.91
40
.00
1.31
23
$11,375,35 $341,260. $400,000
$11,316,61
1.31
54
.00
1.85
20
24
$11,316,61 $339,498. $400,000
$11,256,11
11
1.85
36
.00
0.20
25
$11,256,11 $337,683. $400,000
$11,193,79
0.20
31
.00
3.51
20
26
$11,193,79 $335,813. $400,000
$11,129,60
12
3.51
81
.00
7.31
27
$11,129,60 $333,888. $400,000
$11,063,49
7.31
22
.00
5.53
20
28
$11,063,49 $331,904. $400,000
$10,995,40
13
5.53
87
.00
0.40
29
$10,995,40 $329,862. $400,000
$10,925,26
0.40
01
.00
2.41
20
30
$10,925,26 $327,757. $400,000
$10,853,02
14
2.41
87
.00
0.28
31
$10,853,02 $325,590. $400,000
$10,778,61
0.28
61
.00
0.89
20
32
$10,778,61 $323,358. $400,000
$10,701,96
15
0.89
33
.00
9.22
II.
33
$10,701,96 $321,059. $400,000
$10,623,02
The
Total
9.22
08
.00
8.30
PV of
20
34
$10,623,02 $318,690. $400,000
$10,541,71
16
8.30
85
.00
9.14
35
$10,541,71 $316,251. $400,000
$10,457,97
9.14
57
.00
0.72
20
36
$10,457,97 $313,739. $400,000
$10,371,70
17
0.72
12
.00
9.84
37
$10,371,70 $311,151. $400,000
$10,282,86
9.84
30
.00
1.14
20
38
$10,282,86 $308,485. $400,000
$10,191,34
18
1.14
83
.00
6.97
39
$10,191,34 $305,740. $400,000
$10,097,08
6.97
41
.00
7.38
20
40
$10,097,08 $302,912. $400,000
$10,000,00
19
7.38
62
.00
0.00
Savings in Interest (in future) is $1,489,786 which is less than current years
loss i.e. $2,211,739
The Total PV of Cash-flow Difference is $1,146,992 which is less than Cash
Outflow in current year $1,541,502.41

Hence, we do not recommend Rene to repurchase the existing $10 Million 8%

bonds and issue $10 Million 6% bonds.
Number of bonds to be issued to refund the old 9% bonds is 11,542.
Term

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Savings in
Interest in
future
$120,732
$121,665
$122,640
$123,659
$124,723
$125,836
$126,999
$128,214
$129,483
$130,810
$132,196
$133,645
$135,159
$136,741
$138,395
$140,123
$141,928
$143,815
$145,786
$147,847
Total PV of
Savings

PV

Cash Outflow
Difference

PV

$113,898
$108,281
$102,971
$97,949
$93,201
$88,709
$84,461
$80,443
$76,641
$73,044
$69,639
$66,418
$63,368
$60,481
$57,747
$55,159
$52,707
$50,385
$48,184
$46,099
$1,489,7
86

$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
Total PV of
Cash Outflow
Difference

$94,340
$89,000
$83,962
$79,209
$74,726
$70,496
$66,506
$62,741
$59,190
$55,839
$52,679
$49,697
$46,884
$44,230
$41,727
$39,365
$37,136
$35,034
$33,051
$31,180
$1,146,992

III.
Total PV of Savings when 6% bonds are issued and the proceeds are used to
refund the existing bond is $959,187 while for the previous case it was
$1,489,786.
Also, total PV of cash outflow difference when 6% bonds are issued and the
proceeds are used to refund the existing bond is $616,394 while for the
previous case it was $1,146,992
The losses in the current year remain the same while the cash outflow for the
current year is ($497.59) i.e. Inflow.
Term

Savings in
Interest in
future
$74,472

PV

$70,257

Cash
Outflow
difference
$53,740

PV

$50,698

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

$75,405
$76,380
$77,399
$78,463
$79,576
$80,739
$81,954
$83,223
$84,550
$85,936
$87,385
$88,899
$90,481
$92,135
$93,863
$95,668
$97,555
$99,526
$101,587
Total PV of
Savings

$67,110
$64,130
$61,307
$58,632
$56,098
$53,696
$51,419
$49,260
$47,212
$45,270
$43,428
$41,679
$40,020
$38,445
$36,949
$35,528
$34,178
$32,895
$31,675
$ 959,187

$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
$53,740
Total PV
of Cash
Outflow
Differenc
e

-----------------------xxxx----------------------------

$47,828
$45,121
$42,567
$40,158
$37,885
$35,740
$33,717
$31,809
$30,008
$28,310
$26,707
$25,195
$23,769
$22,424
$21,155
$19,957
$18,827
$17,762
$16,756
$ 616,394