Chapter 7 - 8-11Chapter 7Accounting for Liabilities...

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Unformatted text preview: 8-11Chapter 7Accounting for Liabilities 2Business BackgroundCapital structure is the mix of debt and equity used to finance a company.DEBT:Loansfrom banks, insurance companies, or pension funds are often used when borrowing small amountsof capital.Bondsare debt securities issued when borrowing large amountsof money.Can be issued by either corporations or governmental units.8-23Part I. Time Value of Money4Time Value of Money$ Today ≠ $ Future(Because of interest)-A dollar received in the future is worth less than a dollar received today !!!- A dollar received today is worth more than a dollar received in the future !!! 8-35Time Value of Money – 4 typesPresent Value (PV)Present Value of Annuity (PVA)Future Value (FV)Future Value of Annuity (FVA)* Interest rate (i)** Number of periods (N)6How much is $1 received in the future worth today? (COMPOUNDING)Figuring out how much a future amount is worth TODAY is called DISCOUNTING the cash flow.Present Value of a Single Amount?TODAYFUTURE8-47ioi% = 6% N = 1 FV = 100 PV = ??1PV = FV = 100If you will receive $100 one year from now, what is the PV of that $100 if the relevant interest rate is 6%?8PV (1 + 0.06) = 100 (which is the FV)PV = 100 / (1.06)1 = $94.34ORPV = FV (PV factor i, n)PV = 100 (0.9434 ) (from PV of $1 table )PV = $94.341PV = 94.34FV = 100If you will receive $100 one year from now, what is the PV of that $100 if the relevant interest rate is 6%?8-59The previous example had a single payment. Sometimes there is a series of payments.Annuity: a sequence of equal cash flows, occurring at the end of each period. When the payments occur at the end of the period, the annuity is also known as an ordinary annuity.The Value of a Series of Payments10Finding the present value of a series of cash flows is called discounting the cash flows.What is the series of future payments worth today?1234Present Value of an Annuity8-611i% = 8N = 3PMT = 1,000 PV = ??123100010001000What is the PV of $1,000 at the end of each of the next 3 years, if the interest rate is 8%?12PVA= 1,000 (3 yrs., 8% factor from the PVA table)PVA= 1,000 * (2.5771) PVA= $2,577.10123100010001000What is the PV of $1,000 at the end of each of the next 3 years, if the interest rate is 8%?PresentValue8-713Other issuesSemi-annual interest paymentQuarterly interest paymentMonthly interest payment14Part II. Bonds8-815Characteristics of Bonds PayableBonds usually involve the borrowing of a large sum of money, called principal.The principal is usually paid back as a lump sumat the end of the bond period.Bonds usually carry a stated rate of interest.16Bonds$1,000--principal10%--interest rate (annual)5yrs.--time to maturityannual---interest paymentsThis is the information shown on a bond certificate......
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This note was uploaded on 09/18/2010 for the course BUSS 152 taught by Professor Choiwooseok during the Fall '10 term at Korea University.

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Chapter 7 - 8-11Chapter 7Accounting for Liabilities...

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