Chapter 10 for course website-1

Chapter 10 for course website-1 - Introduction To Financial...

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Introduction To Financial Accounting HKUST Chapter 10 Reporting and Interpreting Bonds Slide 1 Chapter Ten ACCT 101 Fall 2010 Allen Huang Introduction To Financial Accounting HKUST Present Value and Future Value ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ ൌ ܨݑݐݑݎ݁ ܸ݈ܽݑ݁ ሺ1 ൅ ݎሻ ݐ ܨݑݐݑݎ݁ ܸ݈ܽݑ݁ ൌ ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ כ ሺ1 ൅ ݎሻ ݐ Slide 2 Chapter Ten ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ ൌ ܥ 1 ሺ1 ൅ ݎሻ 1 ܥ 2 ሺ1 ൅ ݎሻ 2 ܥ 3 ሺ1 ൅ ݎሻ 3 ൅ ڮ

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Introduction To Financial Accounting HKUST ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ ൌ ܥ 1 ܥ 2 ܥ 3 ൅ ڮ Perpetuities & Annuities PV of Perpetuity Formula ሺ1 ൅ ݎሻ 1 ሺ1 ൅ ݎሻ 2 ሺ1 ൅ ݎሻ 3 ൌ ܥ · ൬ 1 ሺ1 ൅ ݎሻ 1 2 ሺ1 ൅ ݎሻ 2 3 ሺ1 ൅ ݎሻ 3 ൅ ڮ ൰ ܥ 1 ሺ1 ൅ ݎሻ 1 ܥ 1 ܥ Slide 3 Chapter Ten ൌ ܥ · ൦ 1 െ 1 1 ൅ ݎ ൪ ൌ ܥ · ݎ ݎ C = cash payment r = interest rate ܸܲ ൌ ܥ ݎ Introduction To Financial Accounting HKUST Perpetuities & Annuities PV of Annuity Formula ܲݎ݁ݏ݁݊ݐ ܸ݈ܽݑ݁ ൌ ܸܲሺܲ݁ݎ݌݁ݐݑ݅ݐݕ 1ሻ െ ܸܲሺܲ݁ݎ݌݁ݐݑ݅ݐݕ 2ሻ ܥ ݎ ܥ ݎ · 1 ሺ1 ൅ ݎሻ ݐ ൌ ܥ · ൤ 1 ݎ 1 ݎ · ሺ1 ൅ ݎሻ ݐ C = cash payment Slide 4 Chapter Ten r = interest rate t = Number of years cash payment is received
Introduction To Financial Accounting HKUST Liabilities Defined and Classified Liabilities are d t th i measured at their present value at the time incurred. This is the amount a creditor would Slide 5 Chapter Ten a creditor would accept to cancel the debt. Introduction To Financial Accounting HKUST Slide 6 Chapter Ten

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Introduction To Financial Accounting HKUST Understanding the Business The mixture of debt and equity used to finance a company’s operations is ll d th it l t t called the capital structure: Slide 7 Chapter Ten Debt - funds from creditors Equity - funds from shareholders Introduction To Financial Accounting HKUST Characteristics of Bonds Payable Advantages of bonds: Stockholders maintain control because debt Disadvantages of bonds: ` Risk of bankruptcy increases because the control because debt holders can not vote. Interest expense is tax deductible. (Tax shield of interest expense) The impact on earnings is positive because ft b increases because the interest and principal must be paid back as scheduled or creditors will force legal action. Slide 8 Chapter Ten money can often be borrowed at a low interest rate and invested to earn a higher return. (increase ROE)