Report

Long Term Liabilities Capital Structure Debt Financing - Bonds ◦ Interest is tax deductible Equity Financing - Stocks ◦ Dividends paid is not tax deductible Same as Note Payable Note is to one lender Bonds are to several lenders Interest is paid every 6 months – twice a year Usually 20 plus years Bonds sold for capital expenditures Sold to the public or to Large banks (underwrite) for a fee Indenture – characteristics of bond Principle – Face Amount Interest - paid over life of the bond Sinking Fund- payments of principle to acct Secured or unsecured (debentures) Term or serial – all at once or installments Callable (redeemable)– borrower can call it back Convertible – lender can change it to stock Bond terminology Issue Price of Bond Present Value of Principle (Face Amount) $1 plus Present Value of Interest payments $1 Annuity When interest is paid semi annual interest rate is half and time is double ◦ Use the same time and % for both principle and interest ◦ Market Interest Rate is how to rate the value of the bond ◦ Stated Interest Rate is what you use for interest payment and is stated on the bond ◦ ◦ ◦ ◦ The higher the market interest rate, the lower the bond issue price will be. The lower the market interest rate, the higher the bond issue price will be. $100,000 bond issued, 10 years, Stated Interest 7%, Market Interest 7% (same) Face Amount $100,000 Interest Payments-6months 3,500 Market Interest (7%/2) 3.5% Number of Periods (10yrs X2) 20periods Table : Face Value * multiplier $1 3.5% and 20 periods Interest Payment * $1 annuity 3.5% and 20 periods $100000 * .05257 = 50257 $3,500 * 14.2124= 49743 Issue Price 100000 Excel: PV(Market%,#periods,Interest payment, Face amount,0) PV(.035,20,3500,100000,0) FV= $100000 PMT= 3,500 I/yr = 3.5 N= 20 Press PV BE 9-2 pg 443 Issue Bond Cash 100000 Bonds Pay 100000 Pay Interest Expense Interest Expense Cash 3500 3500 $100,000 bond issued, 10 years, Stated Interest 7%, Market Interest 8% Face Amount $100,000 Interest Payments-6months 3,500 Market Interest (8%/2) 4.0% Number of Periods (10yrs X2) 20periods Table : Face Value * multiplier $1 4.0% and 20 periods Interest Payment * $1 annuity 4.0% and 20 periods $100000 * .045639 = 45639 $3,500 * 13.59033 = 47566 Issue Price 93205 Excel: PV(Market%,#periods,Interest payment, Face amount,0) PV(.04,20,3500,100000,0) FV= $100000 PMT= 3,500 I/yr = 4.0 N= 20 Press PV BE 9-3 pg 443 Issue Bond Cash 93205 Bonds Pay 93295 Pay Interest Expense ( 1st 6 months) Interest Expense Bonds Payable Cash 3728 (93205*4%) 228 3500 Interest Expense Bonds Payable Cash 3737 (93205+228*4%) 237 3500 Pay Interest Expense (2nd 6 months) Date Interest Paid (Cash) Interest Expense Increase in Carrying Value Carrying Value Pg 426 $100,000 bond issued, 10 years, Stated Interest 7%, Market Interest 6% Face Amount $100,000 Interest Payments-6months 3,500 Market Interest (6%/2) 3.0% Number of Periods (10yrs X2) 20periods Table : Face Value * multiplier $1 3.0% and 20 periods Interest Payment * $1 annuity 3.0% and 20 periods $100000 * .55368 = 55368 $3,500 * 14.87747 = 52071 Issue Price 107,439 Excel: PV(Market%,#periods,Interest payment, Face amount,0) PV(.03,20,3500,100000,0) FV= $100000 PMT= 3,500 I/yr = 3.0 N= 20 Press PV BE 9-4 pg 443 Issue Bond Cash 107439 Bonds Pay 107439 Pay Interest Expense ( 1st 6 months) Interest Expense Bonds Payable Cash 3223 (107439*3%) 277 3500 Interest Expense Bonds Payable Cash 3215 (107439-285*3%) 285 3500 Pay Interest Expense (2nd 6 months) Date Interest Paid (Cash) Interest Expense Increase in Carrying Value Carrying Value Pg 428 At Maturity Bond Payable 100000 Cash 100000 Before Maturity -premium Bond Payable 93670 Loss 13207 Cash 106877 Fixed Payment Interest (Rate* principle) Difference (reduction in principle) Get Mortgage Cash M/P Make a Payment ◦ Principle ◦ Interest Expense ◦ Cash See page 433 BE 9-17 pg 444 Lessee Lessor --User --Owner Lease Contractual agreement for the right to use the asset for a specified time Operating Leases – rentals Capital Leases – buying a capital asset Debt to Equity Total Liabilities/ Total SE Measure of financial leverage Return on Assets Net Income/Avg Total Assets ◦ Overall profitability Return on Equity Net Income/Avg Total SE ability to generate earnings from resources that owners provide Times Interest Earned Net Income+InterestX+Tax X/Interest X Compares interest expense to net income available to pay interest expense BE 9-18 pg 444 Problems A 9-1, 9-2, 9-4, 9-6, 9-7A