UCB+UGBA102A+Topic07+Slides

UCB+UGBA102A+Topic07+Slides - Long-Term Liabilities...

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Long-Term Liabilities UGBA102A Introduction to Financial Accounting
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UGBA102A Dennis Geyer 2 Types of Long-Term Liabilities LT Notes Payable Mortgages Payable Bonds Payable LT Leases Pension Liabilities Nonpension Postretirement Benefits Deferred Income Taxes
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UGBA102A Dennis Geyer 3 Debt vs. Equity LT Debt LT Debt Reported as liability Interest required Interest tax deductible No dilution of control Lower cost of capital Favorable financial leverage Equity Equity Reported as owners’ equity Dividends optional Dividends not tax deductible Dilution of control Higher cost of capital No financial leverage
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UGBA102A Dennis Geyer 4 Financial Leverage Impact of Financial Leverage $(000s) Company A Company B Company A Company B Total Assets 20,000 $ 20,000 $ 20,000 $ 20,000 $ Bonds Payable - $ 10,000 $ - $ 10,000 $ Capital Stock 20,000 $ 10,000 $ 20,000 $ 10,000 $ Total Equities 20,000 $ 20,000 $ 20,000 $ 20,000 $ Operating Income 4,000 $ 4,000 $ 1,500 $ 1,500 $ Interest Expense - $ 1,000 $ - $ 1,000 $ Net Income 4,000 $ 3,000 $ 1,500 $ 500 $ Return on Equity 20% 30% 7.5% 5.0% Favorable Leverage Unfavorable Leverage
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UGBA102A Dennis Geyer 5 Bonds Face Amount is the principal amount of the bond that is payable at the maturity of the bond and on which the periodic interest payments are computed. Sometimes called the par value. Stated Rate is the interest rate specified in the bond contract that is used to determine the periodic cash interest payments. Sometimes called the coupon rate. Effective Rate is the market rate of interest paid after adjusting the price of the bond. Sometimes called the yield.
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UGBA102A Dennis Geyer 6 Bond Features Registered vs. Coupon Bonds Secured vs. Unsecured Bonds Term vs. Serial Bonds Callable vs. Convertible Bonds Interest-Bearing vs. Zero-Coupon Bonds
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UGBA102A Dennis Geyer 7 Bonds Issued at Face Value Date of Issue A company issues 10 year, 12% bonds with a $100,000 face value dated October 31, 2005. Cash 100,000 $ Bonds Payable 100,000 $ Year End Adjustment Accrued two months' interest ($100,000 x 0.12 x 2/12).
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UCB+UGBA102A+Topic07+Slides - Long-Term Liabilities...

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