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Chapter 9 LTL

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Chapter 9
Long Term Liabilities
Capital StructureDebt Financing - BondsInterest is tax deductibleEquity Financing - StocksDividends paid is not tax deductible
Two sources of Financing
Same as Note PayableNote is to one lenderBonds are to several lendersInterest is paid every 6 months – twice a yearUsually 20 plus yearsBonds sold for capital expendituresSold to the public or to Large banks (underwrite) for a fee
BONDS
Indenture – characteristics of bondPrinciple – Face AmountInterest - paid over life of thebondSinking Fund- payments of principle to acctSecured or unsecured (debentures)Term or serial – all at once or installmentsCallable (redeemable)– borrower can call it backConvertible – lender can change it to stock
BONDS Terminology
Bond terminology
E 9-2 PG 445
Issue Price of BondPresent Value of Principle (Face Amount) $1plusPresent Value of Interest payments $1 AnnuityWhen interest is paid semi annual interest rate is half and time is doubleUse the same time and % for both principle and interestMarket Interest Rate is how to rate the value of the bondStated Interest Rate iswhat you use for interestpayment and is stated on the bond
Pricing a 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 $100,000Interest Payments-6months 3,500Market Interest (7%/2) 3.5%Number of Periods (10yrs X2) 20periods
EXAMPLE – pricing a bond @ Face Value
Table :Face Value * multiplier $13.5% and 20 periodsInterest Payment * $1 annuity3.5% and 20 periods$100000 * .05257 = 50257$3,500 * 14.2124=49743Issue Price 100000Excel:PV(Market%,#periods,Interestpayment, Faceamount,0)PV(.035,20,3500,100000,0)
Three Ways toCalcuate
FV= $100000PMT= 3,500I/yr = 3.5N = 20Press PVBE 9-2 pg 443
Calculator
Issue BondCash 100000Bonds Pay 100000Pay Interest ExpenseInterest Expense 3500Cash 3500
Journal Entry
$100,000 bond issued, 10 years,Stated Interest 7%, Market Interest8%Face Amount $100,000Interest Payments-6months 3,500Market Interest(8%/2)4.0%Number of Periods (10yrs X2) 20periods
EXAMPLE – pricing a bond @at a discount (less than MV)
Table :Face Value * multiplier $14.0%and 20 periodsInterest Payment * $1 annuity4.0%and 20 periods$100000 * .045639=45639$3,500 *13.59033 = 47566Issue Price93205Excel:PV(Market%,#periods,Interestpayment, Face amount,0)PV(.04,20,3500,100000,0)
FV= $100000PMT= 3,500I/yr =4.0N = 20Press PVBE9-3pg 443
Calculator
Issue BondCash93205Bonds Pay93295Pay Interest Expense( 1st6 months)Interest Expense3728 (93205*4%)Bonds Payable 228Cash 3500Pay Interest Expense (2nd6 months)Interest Expense3737(93205+228*4%)Bonds Payable237Cash 3500
Journal Entry- discount
DateInterest Paid (Cash)Interest ExpenseIncrease in Carrying ValueCarrying ValuePg 426
Amortization Table
$100,000 bond issued, 10 years,Stated Interest 7%, Market Interest6%Face Amount $100,000Interest Payments-6months 3,500Market Interest(6%/2)3.0%Number of Periods (10yrs X2) 20periods
EXAMPLE – pricing a bond @at a Premium (more than MV)
Table :Face Value * multiplier $13.0%and 20 periodsInterest Payment * $1 annuity3.0% and 20 periods$100000 *.55368=55368$3,500 *14.87747=52071Issue Price107,439Excel:PV(Market%,#periods,Interestpayment, Face amount,0)PV(.03,20,3500,100000,0)
FV= $100000PMT= 3,500I/yr =3.0N = 20Press PVBE9-4pg 443
Issue BondCash107439Bonds Pay107439Pay Interest Expense ( 1st6 months)Interest Expense3223 (107439*3%)Bonds Payable277Cash 3500Pay Interest Expense (2nd6 months)Interest Expense3215 (107439-285*3%)Bonds Payable285Cash 3500
Journal Entry - Premium
DateInterest Paid (Cash)Interest ExpenseIncrease in Carrying ValueCarrying ValuePg428
AMORTIZATION TABLE
At MaturityBond Payable 100000Cash 100000Before Maturity -premiumBond Payable93670Loss 13207Cash106877
Paying Back Bond
Fixed PaymentInterest (Rate* principle)Difference (reduction in principle)Get MortgageCashM/PMake a PaymentPrincipleInterest ExpenseCash
Mortgages ( Installment Debt)
See page 433BE 9-17 pg 444
Amortization Table
Lessee --UserLessor--OwnerLease Contractual agreement for the right to use the asset for a specified timeOperating Leases – rentalsCapital Leases – buying a capital asset
LEASES
Debt to EquityTotal Liabilities/ Total SEMeasure of financial leverageReturn on AssetsNet Income/AvgTotal AssetsOverall profitabilityReturn on EquityNet Income/AvgTotal SEability to generate earnings from resources that owners provideTimes Interest EarnedNetIncome+InterestX+TaxX/Interest XCompares interest expense to net income available to pay interest expenseBE 9-18 pg 444
Debt Analysis
Problems A9-1, 9-2, 9-4, 9-6, 9-7A
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Chapter 9 LTL