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Published byStephanie Britain Modified over 9 years ago
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Long Term Liabilities
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Capital Structure Debt Financing - Bonds ◦ Interest is tax deductible 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
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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 : 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)
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FV= $100000 PMT= 3,500 I/yr = 3.5 N = 20 Press PV BE 9-2 pg 443
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Issue Bond Cash100000 Bonds Pay100000 Pay Interest Expense Interest Expense3500 Cash 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 : 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)
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FV= $100000 PMT= 3,500 I/yr = 4.0 N = 20 Press PV BE 9-3 pg 443
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Issue Bond Cash93205 Bonds Pay93295 Pay Interest Expense ( 1 st 6 months) Interest Expense3728 (93205*4%) Bonds Payable 228 Cash 3500 Pay Interest Expense (2 nd 6 months) Interest Expense3737 (93205+228*4%) Bonds Payable 237 Cash 3500
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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 : 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)
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FV= $100000 PMT= 3,500 I/yr = 3.0 N = 20 Press PV BE 9-4 pg 443
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Issue Bond Cash107439 Bonds Pay107439 Pay Interest Expense ( 1 st 6 months) Interest Expense3223 (107439*3%) Bonds Payable 277 Cash 3500 Pay Interest Expense (2 nd 6 months) Interest Expense3215 (107439-285*3%) Bonds Payable 285 Cash 3500
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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) Get Mortgage Cash M/P Make a Payment ◦ Principle ◦ Interest Expense ◦ Cash
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See page 433 BE 9-17 pg 444
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Lessee--User Lessor--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 ◦ 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
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Problems A 9-1, 9-2, 9-4, 9-6, 9-7A
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