Lecture17

# Lecture17 - Lecture 17 Accounting for Leases Review...

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Lecture 17 Accounting for Leases

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2 Review • Long-term bonds • Types of bonds (i.e., types of issuers) • Issuing bonds at a premium or discount to par value • Accounting for the bonds • Recognizing a gain or loss from buying back the bond
3 Review: Steps to compute the (market) value of a bond • Figure out the periodic coupon payments – If the coupon payments are every six months, then it’s face value * annual coupon rate * (½) • Figure out the final principal payment at maturity – Usually just the face value • Figure out the current “required rate of return” for a bond commensurate for the riskiness of the bond issuer – This is the key part of the problem and it depends on many firm, industry, and economic factors. – But in this class, the “r” is just given to you, • Do the PV calculations for all payments and sum them at the end to get the NPV – If the coupon payments are every six months, n = twice the number of years and i = half the annual rate of return

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4 Review NPV: Example • NPV short-cut for constant cash flow: • NPV = CF t / r • NPV = \$1,000 / 0.10 = \$10,000 • NPV short-cut for constant growth in CF: • NPV = CF 0 (1+g) / (r – g) = CF 1 / (r – g) • NPV = \$1,000 (1+.05) / (0.10-0.05) = \$21,000 • Example: Altria Group, formerly Phillip Morris – Apply NPV method in a Dividend Discount Model (DDM) – Stock pays a cash dividend of \$1.28 per share – Forecast dividend to grow 5% per year – Estimated cost of capital of 13% (same as i, r, or d) – NPV = (\$1.28)*1.05 / (0.13-0.05) = \$16.80 per share
5 Today • What is a lease? • Criteria for Capital Leases • Criteria for Operating Leases • Example for Operating Lease • Example for Capital Lease

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6 Leases LEASE : The owner (or lessor) of property or equipment permits another party (or lessee) to use property for a specified period of time in exchange for periodic cash payments. ACCOUNTING FOR LEASES - CONCEPTS : A lease is an executory contract or an exchange of promises. Generally Accepted Accounting Principles (GAAP) recognize an asset or liability only when an exchange or transaction takes place. The signing of a lease is not a transaction per se . That is, the signing of the lease contract usually is accompanied by the transfer of the asset to the lessee, it does not provide for the transfer of ownership of the asset. Moreover, by itself, it does not impose an obligation on the lessee. The lessee’s obligation arises from having access to the leased assets in accordance with the terms of the lease contract. However, in certain cases, the conditions for a transaction are
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Lecture17 - Lecture 17 Accounting for Leases Review...

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