Lecture 04 - January 28.docx

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Business Administration
Business Administration 2257
Baldwin Wallace

th January 28 , Lecture three - Liabilities: o Current liabilities: will be paid off in a year. Recorded at their face value o Long-term liabilities: takes more than a year to be paid off. We have to calculate the present value or discounted value of them. Also calculate which portion is due in the next twelve months and move that to current liabilities  Generally:  Bonds:  Leases & Mortgages  Pensions: o Liabilities and GAAP  Recording  Valuation  Disclosure – see page 463 in text for example o Debt/equity ratio – P10-10 and P10-10A - Trust fund of $25,000 when you graduate. What is the present value if the discount rate is 2% and you will graduate in 3 years? (Remember present value is always less) 3 o 25,000 * 1 / (1.02) o 25,000 * .94 o 23,500 - Contingent liabilities o When something has happened, but the outcome and the amount of the outcome are not necessarily known. o To the extent that this is highly probable or probable and you have a good estimate of the outcome, you should record this as a liability (GAAP) o Direct attention to the notes for the financial statement where you give information on what the contingent liability relates to, the management’s estimate of the amount and an explanation (I.e. we’re being sued for x but our lawyers say we should end up paying y) - Criteria for disclosure: o Probability of occurring? High, low o Amount can be reasonability estimated  Don’t record if you can’t estimate o Other information available - Disclosure of contingent assets - Bonds: o A means of raising money for a company (usually a lot of money over a long period of time)  To acquire capital assets  For operations o Terminology  Face value, maturity date and coupon rate o Looks like:  Name of the issuing company  There will be a number so they can keep track of what’s what  Dollar amount and the currency (i.e. CAD)  Depending on your company’s location and dealings, you may want to use a different currency  Stated interest rate (coupon rate) – 5.75% per annum, paid annually. If you hold this bond for 10 years, you will get $57,500. At the end of ten years, you get your million dollars back  Issue date and maturity date  Agents: underwriters  When you issue a bond, you will be working with an investment banker as an underwriter to help you price and sell bonds  List of terms for the bond (rules for what you can do with it – contract) o Bond holders have no say in what happens in the company (you get money, but they don’t have a voice) But shareholders have a voice. I think. o Bond holders rank ahead of shareholders in the event of bankruptcy (i.e. bonds get paid back before ALL THE THINGS) o Bonds are a “fixed rate instrument”  When this bond is issue, the coupon rate is fixed. If you hold that bond, you will receive the same amount each year in interest. But it’s highly unlikely that the market interest rates will stay even. As interest rates fluctuate, you can’t change the interest rate on the bond.  If interest drops, you will get more for the bond if you sell it because those interest rates don’t exist in the market.  If interest raise, you get less if you sell the bond because the interest sucks compared to the marketplace. - Dominion bond rating service o Rates 13 unis that have raise debt capital (10 in Ontario) o U ot T, U of Ottawa are AA o McMaster a low AA o UOIT a high BBB o U of Guelph and Brock U were downgraded in 2011 o May be more downgrades due to salary and pension funding pressures - Long-term liabilities o For long term liabilities we are not focusing on the accounting entries o However, we have to be able to explain the terminology behind these things. o Much more conceptual things behind long term liabilities and no math - Lease o You can buy things outright – what? o Or you can lease it from the company o Air Canada leases a lot of their planes – yay o It is easier on cash flo
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