ACCT 652 Assignment 7.1 Solution.xlsx - 1 Assume at the time of bond issuance July 2 1999 the yield in the market was 5 All the other criteria of the

ACCT 652 Assignment 7.1 Solution.xlsx - 1 Assume at the...

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1 Assume at the time of bond issuance, July 2, 1999, the yield in the market was 5%. All the other criteria of the bond (maturity in 20 years, coupon 8%, and interest are paid semi-annually) are the same. How much would have Lyons received in the transaction now? Please calculate the present value and also enter the transaction in the Financial Statement Effects Template. If the market yield had been 5% at the time of bond issuance, Lyons would have received the present value of the promised future cash flows, or $13,765,416.26 The Journal Entries and corresponding T-Accounts would be the following: 7/2/1999 Cash 13,765,416.26 Long-Term Debt 13,765,416.26 Cash Long-T 7/2/1999 13,765,416.26 7/2/1999 The transaction would be entered into the Financial Statement Effects Template as follows: Balance Sheet Transaction Cash Asset + Noncash Assets = Liabil- ities = +13.765M +13.765M Cash Long-Term Debt 2 Assume further that after 10 years, on January 2, 2009, Lyons wants to buy back the bonds they issued in 1). At this time interest rates have risen to 10%. What would be the price of the bonds in the market at the time of repu Would Lyons generate an (i) economic gain/loss and (ii) accounting gain/ loss? Why would Lyons buy back the bonds and issue new ones at higher interest rates? Please calculate all the relevant present values and also enter th transaction the Financial Statement Effects Template. Focus your discussion on current and future cash flows and ea The price of the bonds at the time of repurchase is once again the present value of the promised future cash flows, or $8,717,884.73 Issue bonds at premium for cash
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(i) - There would be no economic gain or loss - it would be a wash with the exception of nominal t (ii) - The transaction would be entered into the Financial Statement Effects Template as follows: Balance Sheet Transaction Cash Asset + Noncash Assets = Liabil- ities = -3.710M Long-Term Debt The book value of the remaining Long-Term Debt is: The book value of the new Long Face Value $ 10,000,000.00 Face Value Remaining Premium $ 2,427,682.29 Discount Required Remaining Long Term Debt $ 12,427,682.29 New Long Term Debt So, since the Gain or loss on bond repurchase = net bonds payable – repurchase payment, then: Gain on Bond Repurchase $ 3,709,797.56 So, if we assume the coupon rate is unchanged this would not change the cash flow, and thus it would no change the economic situation of the company. They are still paying the same amount every six months. of $3.710 Million on their income statement. Also, we are reducing our liabilities by the same amount. 3 You are a pension fund manager looking for an investment that will provide a reliable stream of income over the nex You want to find the best yield possible while still conforming to the pension fund covenant of investing in investmen bonds or better. You are looking at the following bonds, including Lyons, which have the following characteristics: LYONS INC: 10 years, 10% yield, EBIT Interest Coverage ratio = 4.2, EBITDA interest coverage ratio = 6.1,
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