Follow the Money John Wright

Phone Bill StocksInterest SalariesTaxesDividends Paper Clips Paper Clips???

How big is BCE? Total Revenues 2008 $14.98 billion 2013 $18.18 billion % Revenue Wireless3032 Television1011 Media013 Internet/Wireline Data 2926 Wireline Voice % of 15 = $4.65 b 18% of 18.2 = $3.28 b

Two Fundamentals 1 The difference between “Capital” and “Expense” 2 Depreciation Both are deceptively simple, but …

Capital & Expense Expense Cost of running the business Salaries, pensions, gas, paper clips, etc Deducted from income before taxes are paid Capital Cost of expanding the business Land, buildings, equipment, cables, etc. Paid from monies on which taxes have been paid, or money raised

Capital & Expense E$ Revenue Raised Capital Expenses Taxes Profit Retained Earnings Capital C$ Dividends Interest

Revenues Phone services – Local – LD Internet – Service – Hosting Contracts – Data – 800 – TV carriage - PBX Satellite & FIBE TV (Bell) Cable TV (Rogers) TV Channels – CTV, etc Smartphones (sales, rentals) Salvage

Money Out Buildings, Equipment, Automotive Salaries & Pensions Dividends & Interest Office supplies TaxesMiscellaneous

Capital or Expense? Capital –Big ticket items –Tracked individually –Buildings, Equipment, Automotive Expense –Consumables Gas, electricity, heating fuel –Small items (office supplies, tools, etc) –Salaries –Interest

Expenses – What? Everything needed for the day to day operations – from paperclips to wages Bond interest TaxesDepreciationRents Interest during construction

Expenses – Where to? First –General expenses –Interest –Depreciation Second –Taxes ( –Taxes (≈ 50%) Third –Dividends –Retained earnings

Depreciation (1) Scenario You graduate at the top of the class, walk into a $100k/year job, pay 30% income tax ($30k) and buy a $120k car –You have $70k to live on IF that nice Mr. Oliver says you can depreciate your car over 10 years as a tax deduction ($120k/10 = $12k per year) IF that nice Mr. Oliver says you can depreciate your car over 10 years as a tax deduction ($120k/10 = $12k per year) Tax is now 30% of $(100k-12k) = $26.4k –You have $73.6k to live on

Depreciation (2) Example – Telephone Pole Costs about $2,000 - including –Planning –Purchase –Placement Life is 40 years Depreciation is $2000/40 = $50 per year

Depreciation (3) ‘Straight Line’ (fixed amount/year) ‘Capital Cost Allowance’ (fixed %/year) $ $ t t

Depreciation (4) There is a depreciation rate for every capital item (called assets) They are all added up and deducted from revenue before taxes Theoretically – If depreciation for an asset was banked, at the end of its life there would be enough money to replace it

Depreciation (5) Why bother? Depreciation allows a portion of the Capital cost to be charged as Expense each year it is in service. The total Expense is INCREASED by the amount of Depreciation Therefore the amount on which taxes are paid is DECREASED, hence – lower tax bill

Technological Change Records kept by hand in ledgers, calculations by hand Mechanical adding machines Records kept on ’main-frame’ computers much of the calculation on adding machines Electronic calculators Today – Spread sheet on a PC

Interest During Construction Example - A new C.O. in a new subdivision From the time the land is purchased to the time the first call is made –Money is going out –Nothing is coming in Interest on the money spent on land, building and equipment is a pre-tax expense $ Time Buy land Start Building Install Equipment In service

Capital Comes from: –Sale of stock –Issuance of bonds (debt) –Retained earnings Used for: –Buildings, equipment, vehicles, etc (but not salaries, paper clips, gasoline or other consumables)

Stocks or Bonds? Bond interest is an expense –$2 of revenue will pay off $2 of interest Dividends are paid after tax –$2 of revenue needed to pay $1 in dividends Tax rate is about 50% Why not borrow instead of having to pay dividends? If the % of debt (Debt Ratio) is too high, the bonds are downgraded and cost more

Barrhaven (1) New community First phones served from Nepean Not practical to continue –Capacity of Nepean –Length of each loop Decision – Build a new C.O.

Barrhaven (2) Where to locate the C.O.? What type? How big? How many trunks to nearby C.O.s? How many trunks for LD? Fibre or copper to houses? How many pairs per house/business? Cables – Arial? Underground? Gauge? Any remote distribution sites?

Barrhaven (3) Start digging and building Start laying cable Install equipment and power plant Cutover

Life Cycle Costs (1) 7-State Model (reality about 20 states) Each state has a cost, a time and probabilities of going to another state determined by statistical sampling NeededGood Recycle Repair In ServiceStockFactory

Life Cycle Costs (2) Statistical sampling used to determine –Cost associated with each state –Time in each state –Probability of going next to a given state (some are 0, some are 1, rest are calculated) Run 1,000,000 sets through the model Play “What if ???” –e.g. Trade higher first cost against repair cost

Technological Change Old stuff –Few electronics –Components separable and replaceable –Usually went back into service Modern stuff –Mostly electronics –Components not separable and repairable –Often junked or recycled

Balancing Acts Stocks or Bonds Pay dividends or retain earnings Increase/decrease rates (lose/gain customers) First cost against maintenance cost Capital vs Labour Etc.

Capital v Labour v

Capital & Expense E$ Revenue Raised Capital Expenses Taxes Profit Retained Earnings Capital C$ Dividends Interest

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