course 8 Source of Capital 资本来源.docx

Source of Capital Debt1. Source of Funds - Capital2. Long-Term Capital3. Long-Term Debt Capital4. Bonds Proceeds at Issuance5. Bond Amortization & Interest Expense6. Capital Leases7. Deferred TaxesI. Source of Funds - CapitalA. Framework n Suppliers供应商 - Liabilities - short-term capitaln Creditors 债权人- Debt - long-term capitaln Investors 投资者 Equity - long-term capitalII. Long-term Capital A. Debt Capital借入资本 - Borrower n Borrower must comply to遵守 all the terms and conditions (T&C) included in the financing agreementn Borrower incurs an interest expense for its use of fundsn Lower cost of debt; interest on debt is tax deductiblen Borrowers must achieve the agreed financial performance targets (ratios) covenants Most common ratios to evaluate financing riskl Current ratio 流动比率l Debt / Equity ratiol Interest (expense) coverage Covenants条款 are outlined in the loan or bond indenture 债券契约(document) If the covenants are not met, debtor债务人 is in default 违约A. Debt Capital - Creditor 债权人n From a creditors standpoint debt capital is less risky than equity capital Can impose financial requirements Can request collateral Can take legal actionn Creditors are willing to have a lower returnB. Equity capital Investor n Investor (shareholders) standpoint Realizes share appreciation Receives dividendn More risky from a shareholders standpoint No claims on assets Receives dividends at the discretion of management; no share appreciation guaranteen Investor expects higher return than creditorsn 3. Long-Term Debt CapitalA. Type of Debt Instruments n Term loans & notes Loan reimbursed according a specified re-payment schedulen Bonds Certificate promising to pay the holder: l A specified amount at a stated date maturity date l Interest at a stated rate until the maturity date III. Long-Term Debt Capital A. Type of Bonds 债券n Serial bonds分期偿还债券 redeemed赎回 in instalments at specified datesn Sinking fund bonds - redeemed in instalments at the discretion of the debtor n Mortgage bond抵押债券 secured担保 by pledged assets质押资产 (buildings, equipments)n Convertible bonds可转换债券 - equityIV. Bonds Proceeds at IssuanceA. Present Value 现值of Cash Payments 现金支付n Bonds proceeds at issuance will be based on the sum of the present value of future cash payments The face value of the bonds (principal, par value, stated value) at maturity The periodic interest payments B. Present Value Conceptn Compound interest复利 amount invested earns interest that is compounded annually; interest is retained and re-investedn Present value concept - an amount to be received in the future is discounted / concerted to its (present) value (today) based on a given expected rate of returnC. Present Value IllustrationD. Market Rate of interest 市场利率n The market rate of interest is the rate expected by purchasers of the bonds based on the risks associated with future cash payments obligationsn The market rate at the time of issuance is the effective (borrowing) interest raten The interest expense is based on the effective interest rate n The market rate may differ from the stated rate because of fluctuations between The time the issuer establishes the rate The day the bonds are actually available to investors Creditors risk assessmentn As a result, a bond may be issued at a price that is higher or lower than its face value E. Issued at Par, Premium, Discount n A bond is issued at pa平价发行r when a bond is issued at a price equal to its face valuen A bond is issued at a premium溢价发行 when a bond is issued at a price greater than its face valuen A bond is issued at a discount 折价发行when a bond is issued at a price less than its face value F. Financial Reporting n On the balance sheet, bonds are reported at net book value Face value l Minus unamortized discount l Plus unamortized premiumG. Applicationn Determine the net proceeds of a 3 year bond with a face value of $1,000. at 10% interest (coupon rate) when the effective interest rate is 12%?n Record the net proceeds of a 3 year bond with a face value of $1,000. at 10% interest (coupon rate) when the effective interest rate is 12%?DB: Cash 952DB: Bond discount 48CR: Bond payable 1,000V. Bond Amortization & Interest ExpenseA. Frameworkn Two methods for amortizing the book value账面价值 of bonds that were issued at a price other than face value票面价值 The effective interest rate method Required under IFRS, preferred under U.S. GAAP The straight-line method: evenly amortizes the premium or discount over the life of the bondB. Effective Interest Rate Method n The effective interest rate method applies the market rate when the bonds are issued to the current amortized cost (book value) to determine the interest expense for the periodn The bond amortization is the difference between the interest expense and the interest payment D. Application n Based on the net proceeds of $952 of a 3 year bond with a face value of $1,000. issued at 10% interest (coupon rate) when the effective interest rate is 12%n Record the interest expense, interest payment and discount amortization for year 1, 2 and 3 using the effective interest rate method? Capital LeasesVI. Capital Lease A. Framework n Capital lease covers a period of time that is most of the estimated useful (economic) life of the assetn Assets leased are recorded as if they had been purchased - long-term assetsn The lease obligation is a liability recorded as long-term debtn FASB criteria Ownership is transferred at the end of the lease Lessee has an option to buy Lease term is 75% or more of the economic life of the asset Present value of the lease payments are 90% or more of the fair value of the assetB. Applicationn Record the lease of an equipment with a fair value of $10,000 for 10 years with annual payments of $1,558 & interest of 9%n Record the interest expense and capital lease amortization for year 1n Record the annual asset amortizationVI. Deferred Taxes 递延税收A. Frameworkn Deferred taxes occur when accounting methods to prepare financial statements (GAAP) are different than the accounting methods for tax returnsn Deferred taxes are caused by the differences between the depreciation amounts based on GAAP rules and tax rulesn The differences between GAAP and tax depreciation amounts are temporary and referred as “timing differences” B. Applicationn Deferred tax liabilities are determined b