{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chapter+9+Slides

# Chapter+9+Slides - Chapter Chapter 9 Reporting and...

This preview shows pages 1–7. Sign up to view the full content.

Chapter 9 Reporting and Interpreting Liabilities Slide 1 Chapter Nine ACCT 2010 Fall 2011 Allen Huang Learning Objectives for Ch 9 Define, measure, and report current liabilities. Report long-term liabilities. Report contingent liabilities and capital lease. Report notes payable and explain the time value of money. Apply the concepts of the future and present values. Slide 2 Chapter Nine Apply present value concepts to liabilities.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Understanding the Business The acquisition of assets is financed from two sources: Slide 3 Chapter Nine Debt - funds from creditors Equity - funds from stockholders Understanding the Business Debt vs Equity Cost? Benefit? Slide 4 Chapter Nine
Tax Shield of Interest Expense Income Statement Company A Company B Revenue 10,000 10,000 Expense 4,000 4,000 Net Income Before Interest and Tax 6,000 6,000 Interest 40,000*10%=4,000 0 Net Income Before Tax 2,000 6,000 Tax 2,000*30%=600 6,000*30%=1,800 Slide 5 Chapter Nine Net Income After Tax 1,400 4,200 Total Cash Flow Available for Shareholder and Bondholder 5,400 (1,400 + 4,000) 4,200 (4,200 + 0) \$40,000 * 10% (interest rate) * 30% (tax rate) = \$1,200 Using Debt to Enhance ROE Company A’s return on capital is 10%. Assume A has \$1,000,000 equity and no income tax, the net income is \$1,000,000 * 10% = 100,000. A’s ROE (Return on Equity) = Net Income / Equity = 10% Let’s say A can borrow at a 5% interest rate. If A borrows \$2,000,000. What’s A’s net income? (\$1,000,000 + \$2,000,000) * 10% \$2,000,000 * 5% = \$200,000 Slide 6 Chapter Nine A’s ROE (return on equity) = \$200,000 / \$1,000,000 = 20% As long as A’s borrowing cost is lower than its return on capital. A can enhance its ROE by borrowing.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document