财务报表分析英文课件：ch10 Analysis of Financing Liabilities

1、10CHAPTERAnalysis of Financing LiabilitiesA liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events.Definition：PastPresentFutureBecause of a past event.for future sacrifices. the company has a present oblig

2、ation.1. Introduction A firm can incur obligations in myriad ways:some are a consequence of the firms operating activities, characterized by exchanges of goods and services for the later payment of cashwhereas others result from its financing decisions. generally involves current receipts of cash in

3、 exchange for later payments of cashOperating LiabilitiesFinancing LiabilitiesObligations that arise from operating activities-examples are accounts payable, taxes payable, and other accruals of operating expensesObligations that arise from financing activities-examples are short- and long-term debt

4、, bonds, leases, and the current portion of long-term debt2. Balance sheet debt The liability amount reported on the balance sheet does not equal the total cash outflow required to satisfy the debt. Only the principal portion, that is ,the present value of the future cash flow, is recorded.Current a

5、mount reported on the balance sheetTotal cash outflow in the futureExample: borrowing $100, 10%, actual amount payable at year end is $110. Current LiabilitiesLong-Term Debt Current liabilities are defined as those due within one year or one operation cycle; they result from both operating and finan

6、cing activities.Obligations not payable within one year or the operating cycle, whichever is longer.Classification of LiabilitiesCurrent LiabilitiesCurrent LiabilitiesConsequences of operating activities:Operating and trade liabilities;Advances from customers.Consequences of financing activities:Sho

7、rt-term debt;Current portion of long-term debt.Statement Presentation of Current Liabilities It is important to monitor the relative levels of debt from operating as compared to financing activities. The former arise from the normal course of business activities and represent the required operating

8、capital for a given level of production and sales: a shift from operating to financing liabilities may signal the beginning of a liquidity crisis, as reduced access to trade credit results in increased reliance on borrowingsLong-term DebtvFirms obtain long-term debt financing from public issuance, f

9、rom private placements with insurance companies, pension plans, and other institutional investors; or from long-term bank credit agreement. vThe structure of interest and principal payments varies widely, however, two basic principles should be kept in mind:(1)Debt equals the present value of the re

10、maining future stream of payments.(2)Interest expense is the amount paid by the debtor to the creditor in excess of the amount borrowed.Bond vA typical bond promises two types of payments: periodic interest payments and lump-sum payment when the bond matures.Bond issued at parvBalance sheet impact L

11、isted as liabilities equal to the amount of the proceeds received at issuancevInterest expenseEqual to the book value of the bonds at the beginning of the period multiplied by the market rate of interest at issuanceBond issued at parvCash flowCFO includes a deduction for interest expense which is eq

12、ual to the coupon paymentCFF is increased by the amount receivedCFF is reduced by the bonds par value, upon repayment of the bond at maturity Bonds issued at a premiumvWhen coupon rate market rate.Bonds issued at a discountvWhen coupon rate market rate.Debt with equity featuresConvertible Bonds. vUn

13、der APB14, the conversion feature of a bond is completely ignored when the bond is issued. Thus, the entire proceeds of the bond are recorded as a liability, and interest expense is recorded as if the bond were nonconvertible. vHowever, the conversion feature lowers interest expense. When the bondho

14、lder converts the convertible bond into common stock, the entire proceeds are reclassified from debt to equity.Preferred stockvThe argument against debt classification is that, ultimately, firms can not be forced to pay the dividends or redeem the preferred shares. Unlike creditors, preferred shareh

15、olders do not have the power to force the firm into bankruptcy for noncompliance with the terms of the agreement. (dividend unpaid is recorded as liability) 3. Effect of changes in interest ratesvDebt reported on the balance sheet is equal to the present value of future cash payments discounted at t

16、he market rate on the date of issuance. vIncreases in the current market rate decrease the market value of the debt. vA company that issues fixed-rate debt prior to an increase in market rates experiences an economic gain as a result of the rate change.vThis economic gain or loss is not reflected in

17、 either the income statement or balance sheet.vFor some analytical purposes, the market value of a companys debt may be more relevant than its book value. vIt better reflects the firms economic position and is as important as the current market values of a firms assets. Analysis of a firms absolute

18、and relative level of debt and borrowing capacity should be based on current market conditions.Debt: market or book valuevGiven the effort and assumptions required to estimate market values when they are not provided, we now turn to a discussion of the factors that determine whether the adjustment f

19、rom book value to market value is a useful exercise.vDebt maturities. The effect of interest rate changes on the market value of debt increases with the maturity of the debt. If a firms debt is mostly short-term, changes in interest rates will not appreciably affect its market value.Debt: market or

20、book valuevInterest rates on debts. For adjustable-rate debt, whose interest state varies with the market rate of interest, book value approximates market value and no adjustment is required.vChanges in market interest rates. The adjustment to market value depends on changes in the market rate of in

21、terest. As long as there is no long-term trend, fluctuations in market value tend to offset, leaving the difference between book and market values small. However, when rates rise or fall greatly over several years, the differences between book and market value can be significant.BOND COVENANTSvCreditors use debt covenants in lending agreements to protect their interests by restricting activities of the debtor that could jeopardize the creditors position. vAuditors and management must certify that the firm has not violated the covenants. If any covenant is violated