Transcript Chapter Nine

Long Term Liabilities
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Capital Structure
Debt Financing - Bonds
◦ Interest is tax deductible
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Equity Financing - Stocks
◦ Dividends paid is not tax deductible
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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
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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
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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
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 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.
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$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
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Table :
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Face Value * multiplier $1 3.5% and 20 periods
Interest Payment * $1 annuity 3.5% and 20 periods
$100000 * .05257 = 50257
 $3,500
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* 14.2124= 49743
Issue Price
100000
Excel:
PV(Market%,#periods,Interest payment, Face amount,0)
PV(.035,20,3500,100000,0)
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FV=
$100000
PMT=
3,500
I/yr =
3.5
N=
20
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Press PV
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BE 9-2 pg 443
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Issue Bond
 Cash
100000
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Bonds Pay
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100000
Pay Interest Expense
 Interest Expense
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Cash
3500
3500
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$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
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Table :
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Face Value * multiplier $1 4.0% and 20 periods
Interest Payment * $1 annuity 4.0% and 20 periods
$100000 * .045639 = 45639
 $3,500
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* 13.59033 = 47566
Issue Price
93205
Excel:
PV(Market%,#periods,Interest payment, Face amount,0)
PV(.04,20,3500,100000,0)
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FV=
$100000
PMT=
3,500
I/yr =
4.0
N=
20
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Press PV
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BE 9-3 pg 443
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Issue Bond
 Cash
93205
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Bonds Pay
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93295
Pay Interest Expense ( 1st 6 months)
 Interest Expense
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Bonds Payable
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Cash
3728 (93205*4%)
228
3500
 Interest Expense
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Bonds Payable
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Cash
3737 (93205+228*4%)
237
3500
Pay Interest Expense (2nd 6 months)
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Date
Interest Paid (Cash)
Interest Expense
Increase in Carrying Value
Carrying Value
Pg 426
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$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
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Table :
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Face Value * multiplier $1 3.0% and 20 periods
Interest Payment * $1 annuity 3.0% and 20 periods
$100000 * .55368 = 55368
 $3,500
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* 14.87747 = 52071
Issue Price
107,439
Excel:
PV(Market%,#periods,Interest payment, Face amount,0)
PV(.03,20,3500,100000,0)
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FV=
$100000
PMT=
3,500
I/yr =
3.0
N=
20
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Press PV
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BE 9-4 pg 443
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Issue Bond
 Cash
107439
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Bonds Pay
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107439
Pay Interest Expense ( 1st 6 months)
 Interest Expense
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Bonds Payable
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Cash
3223 (107439*3%)
277
3500
 Interest Expense
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Bonds Payable
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Cash
3215 (107439-285*3%)
285
3500
Pay Interest Expense (2nd 6 months)
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Date
Interest Paid (Cash)
Interest Expense
Increase in Carrying Value
Carrying Value
Pg 428
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At Maturity
Bond Payable
100000
Cash
100000
Before Maturity -premium
Bond Payable
93670
Loss
13207
Cash
106877
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Fixed Payment
Interest (Rate* principle)
Difference (reduction in principle)
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Get Mortgage
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 Cash
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M/P
Make a Payment
◦ Principle
◦ Interest Expense
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Cash
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See page 433
BE 9-17 pg 444
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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
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Debt to Equity
Total Liabilities/ Total SE
Measure of financial leverage
Return on Assets
Net Income/Avg Total Assets
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Overall profitability
Return on Equity
Net Income/Avg Total SE
ability to generate earnings from resources that owners provide
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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
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Problems A
9-1, 9-2, 9-4, 9-6, 9-7A