Chapter+9+Slides+with+notes

Chapter+9+Slides+with+notes - Chapter 9 Chapter 9 Reporting...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 9 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. 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? Cost? Benefit? 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 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 (ROA) is 10%. Assume A has $1,000,000 equity, no debt, 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. Debt-to-Equity Debt-to-Equity = Total Liabilities Total Stockholders’ Equity This ratio shows the relationship between the This ratio shows the relationship between the amount of capital provided by owners and amount of capital provided by owners and the amount provided by creditors. In general, the amount provided by creditors. In general, This ratio shows the relationship between the This ratio shows the relationship between the amount of capital provided by owners and amount of capital provided by owners and the amount provided by creditors. In general, the amount provided by creditors. In general, Slide 7 Chapter Nine a high ratio suggest that a company relies a high ratio suggest that a company relies heavily on funds provided by creditors. heavily on funds provided by creditors. a high ratio suggest that a company relies a high ratio suggest that a company relies heavily on funds provided by creditors. heavily on funds provided by creditors....
View Full Document

This note was uploaded on 12/20/2011 for the course ACCT/MGMT 2010 taught by Professor A during the Spring '11 term at HKUST.

Page1 / 27

Chapter+9+Slides+with+notes - Chapter 9 Chapter 9 Reporting...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online