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Module 1

Introduction to the course

“But I think that there’s no magic to evaluating any financial asset. A financial asset means, by definition, that you lay out money now to get money back in the future. If every financial asset were valued properly, they would all sell at a price that reflected all of the cash that would be received from them forever until Judgment Day, discounted back to the present at the same interest rate.”

Warren Buffett

What we will be doing

You must understand financial statements and present values before we can really start!!

First- where are you now-The exam

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From the following information for Mater, Inc., prepare the financial statements for the year ending December 31, 2015.

Cash 58,000 Common Stock 1,000Accounts Receivable 16,000 Paid in Capital 49,000Allowance for Doubtful Accounts 1,000 Retained Earnings 324,000Inventory 80,000 Sales 410,000Building 200,000 Cost of Goods Sold 200,000Equipment 100,000 Salary Expense 50,000Accumulated Depreciation 20,000 Rent Expense 36,000Security Deposit 3,000 Depreciation Expense 10,000Accounts Payable 12,000 Office Expense 9,800Salaries Payable 4,000 Bad Debt Expense 200Taxes Payable 6,000 Interest Revenue 1,000Note Payable, Long-Term 40,000 Interest Expense 5,000

Income Tax Expense 30,000

Mater Inc. declared and paid a $5,000 dividend in 2015. The beginning Common Stock was $40,000 and beginning Retained Earnings was $259,000. There were 800 shares of common stock outstanding at the beginning of the year and 1,000 shares outstanding at the end of the year. The company sold 200 shares on June 30,2015.

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From the following information for 2015 for Elsa’s Olaf, Inc. prepare Financial Statements. Assume a December 31 year end.

Accounts Payable $200,000Accounts Receivable 82,000

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Accumulated Depreciation 46,000Advertising Expense 19,000Allowance for Doubtful Accounts 2,000Bad Debt Expense 1,000Building 300,000Cash 116,000Common Stock, $10 Par 10,000Cost of Goods Sold 500,000Depreciation Expense 28,000Equipment 140,000Interest Expense 5,000Inventory 120,000Notes Payable, Long-Term 10,000Paid in Capital 270,000Patent 50,000Preferred Stock 10,000Rent Expense 75,000Retained Earnings 174,000Sales 825,000Salaries Payable 60,000Salary Expense 100,000Tax Expense 18,000Taxes Payable 9,000Treasury Stock 3,000Utilities Expense 39,000

Elsa’s Olaf, Inc. issued 200 shares of common stock on June 30, 2015. There were 800 shares of common stock outstanding at the end of 2014. The company declared and paid a $10,000 dividend on the common stock and a $500 dividend on the preferred stock during 2015. The beginning Common Stock and Paid in Capital totaled $210,000 and the beginning Retained Earnings was $164,500.

Homework Module 1

Listed below are the accounts for Colton’s Peppa Pigs, Inc. at December 31, 2015 and their balances. The amounts listed for the Income Statement accounts are before the closing entry has been posted. The amounts for the Balance Sheet accounts are after the closing entry has been posted.

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Accounts Payable $ 60,000Accounts Receivable 150,000Accumulated Depreciation 85,000Advertising Expense 8,000Building 200,000Cash 183,200Common Stock 20,000Cost of Goods Sold 460,000Equipment 100,000Interest ExpenseInsurance Expense

9,600 2,400

Inventory 62,000Depreciation Expense 46,000Note PayableOffice Expense

80,000 2,000

Paid In CapitalRent Expense

200,000 36,000

Retained Earnings 280,200Sales 900,000Salaries PayableSalary Expense

8,000 200,000

Security Deposit 40,000Tax Expense 37,800Taxes Payable 12,000Utilities Expense 10,000

Colton’s Peppa Pigs beginning balance (12/31/14) in Retained Earnings was $190,000 and the beginning Common Stock and paid in capital balances were $140,000. The company had 13,000 shares of $1 par value common stock outstanding at the beginning of the year. During 2015 the company paid a dividend of ????. The corporation issued 7,000 shares of common stock on April 1, 2015. The Note Payable requires annual payments of $10,000 on principal plus interest at 8% on December 31st. (You need to do some figuring to get the common stock correct.)

From the following information for Helming, Inc., prepare financial statements (Income Statement, Balance Sheet and Statement of Owners’ Equity for the year ending December 31, 2015.

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Cash 58,000 Accounts Receivable 80,000 Allowance for Doubtful Accounts 4,000 Inventory 100,000 Building 200,000 Equipment 80,000 Accumulated Depreciation 56,000 Security Deposit 3,000 Accounts Payable 12,000 Salary Payable 4,000 Taxes Payable 6,000 Note Payable- Long Term 100,000 Common Stock $1 par 5,000 Capital in Excess of Par 45,000 Preferred Stock 20,000 Retained Earnings 279,000 Treasury Stock 10,000 Sales 610,000 Cost of Sales 300,000 Salary Expense 100,000 Rent Expense 36,000 Depreciation Expense 28,000 Office Expense 6,500 Interest Expense 5,500 Tax Expense 40,200

Helming had 80,000 shares of common stock outstanding on December 31, 2014. They sold 1,000 shares for $20 each on June 30, 2015. The Beginning Retained Earnings was $175,000. Helming, declared and paid a $5,000 dividend on December 15, 2015 on the common stock. There are 200 shares of preferred stock outstanding issued at $100 per share. The Preferred stock carries a 10% dividend and each share is convertible into one share of common stock. The Note Payable is payable at $20,000 per year.

Modules 2 and 3Continuing with the Review

Types of Earnings Per Share

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Capital Structure

S______________

C______________

Basic

Fully Diluted

Types of Income Statements

1) C___________________ or multi-step

2) S___________ S_________

Review of Present Values

Time Value of Money

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You have a choice- $100 today, $105 in one year or $115 in two years. You do not need money today and the money is safe if you decide to take it later. How would you make this decision?

The idea of Opportunity Cost ________________________________________________________________

_______________________________________________________________

Problems

1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank pays interest at 4% compounded annually?

2) Compounded semi-annually?

3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8% compounded annually?

4) What if you want $1,000,000 in 20 years at 12% compounded semi-annually?

5) Problem 4 compounded quarterly?

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Annuities 1) How much do you need to put in the bank today so you can take out $100 per year

for each of the next two years? The bank pays interest at 12% compounded annually. You will make your first withdrawal exactly one year from today.

2) How about $1,000 per year for next 4 years, bank pays interest at 10% compounded annually?

3) How much do you need to put in the bank today so you can take out $10,000 per year for the next five years? The bank pays interest at 8% compounded annually.

4) How about $100 for 10 years, same bank and interest?

5) How about $500 per year for the next 30 years, bank pays interest at 8%, compounded annually?

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6) How much do you need to put in the bank today to have $110 in one year if the bank pays interest at 10%, compounded annually?

7) What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually?

Payments

You are buying a Mercedes for $75,000. You pay $5,000 down and will pay the rest in five annual payments of $15,723.90 beginning one year from today. The payments include interest at 4%. Prepare an amortization schedule.

How did I get the payment amount?

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Now Amortize the loan Ending or Unpaid

Applied to Principal Periods Payments Interest 4% Principal Balance

Total Cost 75,000.00

Down Payment 5,000.00 5,000.00 70,000.00

1 15,723.90_______________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

Go back to the Mercedes- how would we do monthly payments?.......

ProblemsEric wants to buy a new Mercedes. The cost is $80,000. Eric will put 10% down and pay the rest in 5 equal annual payments which include interest at 8%. How much are the payments?

If Eric amortizes the above loan correctly, what would be the interest expense for the second year?

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If Eric amortizes the loan correctly, what would be the principal balance after the third payment?

If Eric made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?

Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $1,000,000 in the bank in thirty years. If the bank pays interest at 6% compounded semi-annually, how much does she need to deposit today to reach her goal?

Cindy wants to withdraw $1,000 per month for the next 5 years. She will withdraw her first amount in one month. The bank pays interest at 12% compounded monthly. How much does she need to deposit today to do this?

Heather hit the lottery!! She has the option of taking 560,000 today or 100,000 per year for the next 8 years, or $1,000,000 in ten years. If she can deposit her money at 8%, ignoring taxes, which deal should she take?

Bob wants to buy a new Harley. The cost is $60,000. Bob will put 10% down and pay the rest in 3 equal annual payments which include interest at 8%. How much are the payments?

Amortize the loan

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If Bob made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?




Chris hit the lottery!! She has the option of taking $520,000 today or $90,000 per year for the next 8 years, or $85,000 per year for the next nine years or $1,000,000 in ten years. If she can deposit her money at 6%, ignoring taxes, which deal should she take?

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Differential Interest Sam will sell you a Bopper for $8,000. No money down and 5% interest per year for five years. At the end of the fifth year, you send him both that year’s interest and the $8,000. You send him the 5% each year. How much are you really paying for the Bopper in today’s dollars? (The bank would charge you 10% interest for a loan of this type).

Remember Kirch’s 2nd Law of the Universe:

T___________________________________________________

and it___________________________________________________!

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Amortize it.

What if the Sam deal had been for five equal payments that included interest at 5%? Current rate for similar loans is 10%

Amortize it.

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What a deal!! Buddy will sell you an airplane for $300,000. $30,000 down and the rest in five equal easy payments which include interest at 5%. A realistic interest rate would be 10%. How much are you really paying in today’s dollars? Prepare the amortization schedule.

Christine wants to buy a new Lexus. The car she wants has a Manufacturer’s Suggested Retail Price of $45,000. The dealer has offered to sell Christine the car for $44,000. He has also offered her 5 years of financing with an interest rate of only 5%!! The complete deal is that she puts down $4,000 then she makes annual interest payments of 5%. At the end of the fifth year also pays the $40,000. Christine called the bank and they told her that a car loan like this would normally have an 8% interest rate.

In today’s dollars, how much is Christine really paying for the Lexus if she takes the Dealer’s Deal?

Assume she takes the Dealer Deal, amortize the payments

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Go back to the Christine problem. Assume the Dealer Deal was, $44,000, $4,000 down and the rest in equal annual payments that include interest at 5%.

How much is Christine really paying for the Lexus if she takes the Dealer’s Deal?

Assume she takes the Dealer Deal, amortize the payments

Now apply the same concepts to pricing bonds

Darby Company issues a $100,000 on 12/31/14, 15%, bond that matures in 5 years. Interest is paid on December 31st of each year. How much would Darby receive is the bond was priced to yield:

10% 15% 20%

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Still Darby Company - How about an 8% zero issued on 12/31/14, due in 3 years, face amount of $100,000. How much would you pay? Amortize it.

Doozer wants to sell you an interest only Bond with a face value of $1,000,000. The face rate on the bond is 10% and has four years left to run and is seasoned.

A. How much would you pay for the bond to earn 12%? Amortize it.

B. How much would you pay for the bond to earn 8%? Amortize it.

Homework Modules 2 and 3Problem 1

From the following balances for Nugget, Inc., as of (and for the year ended) December 31, 2016, prepare and income statement, a balance sheet and a statement of owners’ equity. No common stock was issued during the year and the beginning balance in Retained Earnings was $180,000.

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Cash 10,000 Accounts Receivable 50,000 Allowance for Doubtful Accounts (2,000) Inventory 80,000 Prpeaid Insurance 6,000 Land 20,000 Building 980,000 Equipment 260,000 Furniture and Fixtures 30,000 Accumulated Depreciation (240,000) Goodwill 40,000 Accounts Payable 40,000 Salaries Payable 12,000 Taxes Payable 10,000 Interest Payable 2,000 Bond Payable 600,000 Common Stock 10,000 Capital in Excess of Par 190,000 Retained Earnings 370,000 Sales 2,000,000 Cost of Sales 1,200,000 Salary Expense 460,000 Depreciation Expense 83,000 Utility Expense 18,000 Office Expense 8,000 Interest Expense 3,000 Tax Expense 33,000

(Did the company pay a dividend? If yes, how much was it?)

Problem 2, From the following information for 2015 for Suzie’s Medical Company, Inc. prepare Financial Statements. Assume a December 31 year end.

Accounts Payable $200,000Accounts Receivable 83,000Accumulated Depreciation 46,000Advertising Expense 19,000Allowance for Doubtful Accounts 3,000

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BuildingCash 106,000Common Stock 300,000Cost of Goods Sold 500,000Equipment 140,000Interest Expense 5,000Inventory 120,000Depreciation Expense 28,000Notes Payable, Long-Term 10,000Paid in CapitalPatent

50,000

Rent Expense 75,000Retained Earnings 171,000Sales 825,000Salaries Payable 60,000Salary Expense 100,000Tax Expense 18,000Taxes Payable 9,000Utilities Expense 40,000

Suzie issued 200 shares of common stock on June 30, 2015. There were 800 shares of common stock outstanding at the end of 2014. The company declared and paid a $10,000 dividend during 2015. The beginning Common Stock was $240,000 and the beginning Retained Earnings was $141,000.

Problem 3. Hannah is thinking about buying a sailboat. The dealer has offered her three options.

Option 1: She can pay $30,000 for the boat, no money down and the rest in 60 equal monthly payments that include interest at 2%,

Option 2: She can pay $28,000, 10% down and the rest in 48 monthly payments of interest only at 2%. At the end of 48 months in the second deal, she would pay the balance of the purchase price, $25,200.

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Option 3: She pays $25,000 for the boat right now.She called her bank and they told her that boat loans currently carry an 8% interest rate.

Which is the better deal?

Amortize the first five months of each deal.

Problem 4. You want to buy a new Bright Yellow Geo Prism. You are trying to decide between the following deals. You called the bank and they told you they would loan you the money at a 10% interest rate.

Deal #1. Cory’s very fine used cars has offered you the car for $12,000 with the following terms. $1,200 down and interest only payments of 2% per year for 5 years. At the end of the five years you send him the $9,000. (He says he is offering you this special deal because you go to Ohio U and he almost graduated from there!)

Deal #2. Honest Dave has offered you the same car for $9,999 payable with no money down and the rest in three equal annual payments which include interest at 5%.

Deal #3. Sarah’s Special Deals has offered you the car for $8,700 payable with $200 down and the rest in ten annual equal payments which include interest at 10%. The first payment, after the down payment, will be due in one year.

Deal #4. Lauren’s Prism Sales has offered you the car for $9,000 cash.

Rank the deals as to their attractiveness to you. Which deal is the best and why?

Problem 5 Buddy wants to sell you a car. $20,000, no money down and you pay interest of only 4% for one year. At the end of the year along with your 4% interest, you pay Buddy $20,000 for the car. You think this is a heck of a deal because if you borrowed the money from a bank it would cost you 12%. What a deal? Or,.. how much are you really paying for the car? And Sam has offered you the same car for $18,000 cash - what to do, what to do............

Problem 6. Nick wants to sell you a thing-a-ma-jig for $100,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the

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same item on sale for $85,000. If you bought the item for $85,000, you would have to borrow the money from the bank at 12%. Which is the better deal?

Problem 7. Ryan Company issues a $100,000 on 8/31/14, 10%, bond that matures in 5 years. Interest is paid on August 31st of each year. How much would you pay to yield:

8% 10% 14%

Problem 8. Still Ryan Company - How about a zero issued on 5/31/14, due in 4 years, face amount of $100,000. Current market rates are 11%. How much would you pay?Amortize it.

Problem 9. CoJo wants to sell you a bond with a face value of $1,000,000. The face rate on the bond is 10% and is payable in 4 equal payments which include interest at 10%. The bond has four years left to run and is seasoned.

A. How much would you pay for the bond to earn 12%? Amortize it.

B. How much would you pay for the bond to earn 8%? Amortize it.

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Financial Statement Analysis

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Module 4struthious Lazy people aresycophant always anxiouspugnacious to be doing something.

Marquis De Vauvenargues

Hermi’s Bumbles, Inc.

Hermi’s Bumbles is a company that has been in business for three years. The company is a wholesaler of Bumbles. Bumbles are bulbs which grow into beautiful, sweet smelling plant-trees. They are a cross between a hyacinth and a buckeye. They are refrigerated and must be planted within one year of when they are harvested. Hermi buys the bumbles from a grower when they are one month old. Hermi has one location in Columbus, Ohio. It has three refrigerated trucks which deliver the Bumbles throughout Ohio. The financial statements on the previous page summarize Hermi’s operations for its first three years.

Hermi began operations with individuals investing $120,000 for 12,000 shares of common stock and a small business loan of $200,000 from the bank. The loan carries interest at 12%. Hermi must pay the interest plus $10,000 on the principal on January 1 of each year. Hermi sells using terms of 2/10 n/30. The latest sale of stock between individuals was yesterday at $85.00 per share. There are more shares available from the other investors for this amount. The tax rate is 30%.

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Do you want to buy more, sell yours or just sit tight?Why??You would pay for one share of stock $ ____________

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Analyzing Hermi’s

Current Ratio

Which tells us?

Calculate the Current Ratio for 2014 and 2015

The Quick or “Acid Test” Ratio

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“Occam’s Razor”

Calculate the Accounts Receivable Turn for 2014 and 2015

And the average collection period for the two years

Calculate the Inventory Turn

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Calculate the Average Days Sales In Inventory

Calculate Book Value Per Share

Return on Assets ROA

Which tells us?

Return on Equity ROE

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Which tells us?

Leverage What causes the difference between the ROA and the ROE??

Debt Ratio

Debt to Equity

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Which tells us?

Now break the ROI down into component parts using the Dupont Model

Use of Leverage

You have decided to open a hot dog stand at the corner of Court and Union. The following is your opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she sells.

AssetsCash 5,000Inventory 10,000Cart 35,000 Total 50,000

Liabilities -0-

Owners’ EquityCommon Stock 50,000Retained Earnings -0- Total 50,000

Expand using Expand using Stock Loan

For the First Year Sales 60,000 Cost of Sales 12,000

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Gross Margin 48,000 Operating Expenses Wages 23,000 Other 10,000 Total Operating Expenses 33,000 Operating Income 15,000

Net Income Before Taxes ______ Tax Expense Net Income .

EPS .

You paid all your income out as a dividend. You want to expand to Oxford. You will need to invest a total of $60,000. You expect your sales and cogs to double with the new operation. Your wage expense for Oxford will be based the same as it is in Athens. Your other expenses will increase to $12,000. Your tax rate is 30%. You can either sell 60,000 shares of stock for $1 each or you can borrow the money from the bank. The bank will charge you 8% interest on the loan. Prepare the income statement for next year if you do the deal under each of the alternatives. Assume the deal is done on January 1st.

Window Dressing

Cash $300,000 Accounts Payable $200,000 Accounts Rec 100,000 Other payables 200,000 Inventory 100,000 Total Current Assets 500,000 Total Current Liabilities 400,000

Current Ratio is

Now pay off the Accounts Payable

The Current Ratio is

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Common Size Financial Statements

The probability of someone watching you is proportional

to the stupidity of your action.

Module 4 HomeworkProblem 1Calculate all the ratios you have learned for both Kevin’s Kennels and Colton’s Colts (see next two pages). Compare and contrast the two companies using the ratios you have learned. Use a market price per share of $5 for Kevin’s and $4 per share for Molly’s.

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Kevin’s Kennels

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Balance 12/31/14

Balance 12/31/5

Cash 28,900 81,900Accounts Receivable 45,000 78,000Inventory 90,000 70,000Prepaid Insurance 2,600 3,600Equipment 280,000 320,000Accumulated Depreciation 20,000 80,000Land 130,000Security Deposits 20,000 32,000Accounts Payable 30,000 35,000Wages Payable 10,000 6,000Rent Payable 4,000 8,000Interest Payable 7,500 6,500Taxes Payable 5,000 10,000Note Payable 150,000 130,000Common Stock ($1 each) 160,000 310,000Retained Earnings 80,000 130,000Sales 1,200,000Cost of Goods Sold 700,000Wage Expense 220,000Rent Expense 48,000Office Expenses 46,000Depreciation Expense 60,000Utilities Expense 15,000Insurance Expense 6,000Interest Expense 14,000Income Tax Expense 27,000

The land was acquired on March 31, 2014 by exchanging 60,000 shares of common stock worth $60,000 and cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase of the land) was sold on September 30, 2014 for $1 per share. The company did not sell any equipment during the year. All equipment purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30 th of each year.

CoJo’s Colts, Inc. Balance Balance

12/31/15 12/31/14Cash 97,600 88,900Accounts Receivable 90,000 50,000Allowance for Doubtful Accounts 3,600 2,000Inventory 120,000 40,000Prepaid Insurance 2,900 3,600Prepaid Rent 0 3,000Equipment 320,000 220,000Accumulated Depreciation 50,000 20,000Land 100,000

Security Deposits 8,000 10,000 Accounts Payable 35,000 30,000

Salaries Payable 6,000 10,000Rent Payable 3,000 0Interest Payable 9,000 10,000Taxes Payable 10,000 5,000Note Payable 180,000 200,000Common Stock ($1 each) 160,000 50,000 Retained Earnings 281,900 88,500Sales 1,400,000Cost of Goods Sold 700,000Salary Expense 185,000Rent Expense 36,000Advertising Expense 85,000

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Office Expenses 27,000Depreciation Expense 30,000Utilities Expense 12,000Bad Debt Expense 6,500Insurance Expense 6,000Miscellaneous Expense 3,000Interest Expense 9,500Income Tax Expense 90,000

The land was acquired on June 30, 2015 by exchanging 80,000 shares of common stock worth $80,000 and cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase of the land) was sold on September 30, 2015 for $1 per share. The company did not sell any equipment during the year. All equipment purchased during the year was purchased for cash. The balance in retained earnings for each year is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30 th of each year.

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Explanations and Calculations of the RatiosSusanne Freeland

Current Ratio = Working Capital RatioCurrent AssetsCurrent Liabilities

Measure of liquidity – a company has sufficient liquid assets to cover its current obligations.

The higher the ratio the better able a company can meet its current obligations.

Return on Assets = Net Income Ave. Total Assets

Measure of how well a company uses its assets to create profits.

The company wants to create a return that satisfies its shareholders (owners).

Investors use this ratio to evaluate company leadership.

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Return on Equity = Net Income Ave. Equity

Measures the success of company’s financing, investing and operating activities.

A company that generates a high return relative to its shareholders equity is considered a sound investment. The original investors will be repaid with the proceeds from business operations.

Debt Ratio = Total Liabilities Total Liabilities + Total Owners’ Equity

= Total Liabilities Total Assets

Debt to Equity Ratio = Total Liabilities Total Owners’ Equity

The more outstanding debt a company has, the more its earnings must go to making the payments on this debt load. This limits the amount of capital available to grow the business or pay dividends to the shareholders.

The more debt a company carries, the more risk is being taken by the creditors as opposed to the shareholders.

Inventory Cost of Goods SoldTurnover Average Inventory

Average Inventory = Inventory @ BOY + Inventory @ EOY/2

Measures the success a company has in converting (turning) its investment in inventory into sales.The number of times a company sells and replaces its inventory during a given period.

Average Days = __ 365_____ Sales in Inventory Inventory Turn

The number of days sales, on average, that a firm carries in inventory.

Acid Test Ratio = Quick RatioCurrent Assets - Inventory

Current Liabilities

A stringent test that indicates whether a company has enough current assets to cover immediate liabilities without selling inventory.

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Accounts Receivable Turnover

Sales / Average Net Accounts Receivable

The number of times the accounts receivable are turned over or are collected during the period.

Average Collection Period

365 days per year / Accounts Receivable Turn

The number of days it takes on average to collect an account receivable.

Earnings Per Share (Basic)

Net IncomeWeighted Average number of shares of common stock

The dollar amount of earnings that is associated with each share of stock.

Book Value per Share

Assets – Liabilities Number of shares of common stock at the end of the year

The dollar amount of equity that is associated with each share of stock.

Price Earnings Ratio

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Market Price per share Earnings per share

This tells you how expensive a share of stock is in relation to its earnings.

Dupont Model

ROA and ROE ratio[edit]

The return on assets (ROA) ratio developed by DuPont for its own use is now used by many firms to evaluate how effectively assets are used. It measures the combined effects of profit margins and asset turnover. [2]

The return on equity (ROE) ratio is a measure of the rate of return to stockholders.[3] Decomposing the ROE into various factors influencing company performance is often called the Du Pont system.[4]

Where

Net income = net income after taxes

Equity = shareholders' equity

EBIT = Earnings before interest and taxes

This decomposition presents various ratios used in fundamental analysis.

The company's tax burden is (Net income ÷ Pretax profit). This is the proportion of the company's profits retained after paying income taxes. [NI/EBT]

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The company's interest burden is (Pretax income ÷ EBIT). This will be 1.00 for a firm with no debt or financial leverage. [EBT/EBIT]

The company's operating income margin or return on sales (ROS) is (EBIT ÷ Sales). This is the operating income per dollar of sales. [EBIT/Sales]

The company's asset turnover (ATO) is (Sales ÷ Assets).

The company's leverage ratio is (Assets ÷ Equity), which is equal to the firm's [[debt to equity ratio]+1] . This is a measure of financial leverage.

The company's return on assets (ROA) is (Return on sales x Asset turnover).

The company's compound leverage factor is (Interest burden x Leverage).

ROE can also be stated as:[5]

ROE = Tax burden x Interest burden x Margin x Turnover x Leverage

ROE = Tax burden x ROA x Compound leverage factor

Profit margin is (Net income ÷ Sales), so the ROE equation can be restated:

General Motors2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 TTM

Revenue USD Mil — —148,979104,589135,592150,276152,256155,427155,929 152,356

153,909

Gross Margin % — — -0.2 -7.3 12.4 12.7 7.1 11.6 8.9 12.0 12.5

Operating Income USD Mil — — -21,230 -21,023 5,084 5,656 -30,363 5,131 1,530 4,897 6,116

Operating Margin % — — -14.3 -20.1 3.7 3.8 -19.9 3.3 1.0 3.2 4.0

Net Income USD Mil — — -30,943104,821 6,172 9,190 6,188 5,346 3,949 9,687 10,695

Earnings Per Share USD — — -53.47 113.18 2.89 4.58 2.92 2.38 1.65 5.91 6.63

Dividends USD — — — — — — — — 1.20 1.38 1.46

Payout Ratio % — — — — — — — — 58.2 48.4 22.0

Shares Mil — — 579 925 1,624 1,668 1,675 1,676 1,687 1,640 1,614

Book Value Per Share USD — — — — 17.19 21.95 18.92 19.21 24.93 23.09 26.58

Operating Cash Flow USD Mil — — -12,065 -17,239 6,780 8,166 10,605 12,630 10,058 11,978 11,439

Cap Spending USD Mil — — -7,530 -5,379 -4,200 -7,078 -9,118 -7,565 -7,091 -7,874 -8,475

Free Cash Flow USD Mil — — -19,595 -22,618 2,580 1,088 1,487 5,065 2,967 4,104 2,964

Free Cash Flow Per Share USD — — — — 1.59 -0.27 0.89 0.34 1.82 3.20 —

Working Capital USD Mil — — -31,341 6,812 5,896 11,315 16,004 19,089 17,969 6,541 —

Key Ratios

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Margins % of Sales 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 TTM

Revenue — — 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

COGS — — 100.19 107.27 87.61 87.29 92.90 88.38 91.14 87.99 87.51

Gross Margin — — -0.19 -7.27 12.39 12.71 7.10 11.62 8.86 12.01 12.49

SG&A — — 9.57 11.63 8.64 8.09 8.93 7.97 7.80 8.80 8.52

R&D — — — — — — — — — — —

Other — — 4.50 1.20 — 0.86 18.12 0.35 0.08 — —

Operating Margin — — -14.25 -20.10 3.75 3.76 -19.94 3.30 0.98 3.21 3.97

Net Int Inc & Other — — -5.53 118.10 0.48 0.22 0.07 1.50 1.74 1.85 1.73

EBT Margin — — -19.78 98.00 4.23 3.98 -19.87 4.80 2.72 5.07 5.70

Profitability 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12

Tax Rate % — — — — 11.71 1.84 — 28.52

Net Margin % — — -20.77 100.10 3.44 5.05 3.19 2.43

Asset Turnover (Average) — — 1.64 0.92 0.99 1.06 1.04 0.98

Return on Assets % — — -33.99 92.10 3.39 5.35 3.31 2.39

Financial Leverage (Average) — — — 6.41 5.39 5.21 5.78 4.21

Return on Equity % — — — — 19.85 28.35 18.14 11.54

Return on Invested Capital % — — — — 11.59 18.76 11.16 6.52

Interest Coverage — — -10.67 17.74 6.23 12.08 -60.88 23.33

2006-122007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 TTM

Revenue USD Mil — —148,979104,589135,592150,276152,256155,427155,929152,356 153,909

Gross Margin % — — -0.2 -7.3 12.4 12.7 7.1 11.6 8.9 12.0 12.5

Operating Income USD Mil — — -21,230 -21,023 5,084 5,656 -30,363 5,131 1,530 4,897 6,116

Operating Margin % — — -14.3 -20.1 3.7 3.8 -19.9 3.3 1.0 3.2 4.0

Net Income USD Mil — — -30,943104,821 6,172 9,190 6,188 5,346 3,949 9,687 10,695

Earnings Per Share USD — — -53.47 113.18 2.89 4.58 2.92 2.38 1.65 5.91 6.63

Dividends USD — — — — — — — — 1.20 1.38 1.46

Payout Ratio % — — — — — — — — 58.2 48.4 22.0

Shares Mil — — 579 925 1,624 1,668 1,675 1,676 1,687 1,640 1,614

Book Value Per Share USD — — — — 17.19 21.95 18.92 19.21 24.93 23.09 26.58

Operating Cash Flow USD Mil — — -12,065 -17,239 6,780 8,166 10,605 12,630 10,058 11,978 11,439

Cap Spending USD Mil — — -7,530 -5,379 -4,200 -7,078 -9,118 -7,565 -7,091 -7,874 -8,475

Free Cash Flow USD Mil — — -19,595 -22,618 2,580 1,088 1,487 5,065 2,967 4,104 2,964

Free Cash Flow Per Share USD — — — — 1.59 -0.27 0.89 0.34 1.82 3.20 —

Working Capital USD Mil — — -31,341 6,812 5,896 11,315 16,004 19,089 17,969 6,541 —

Efficiency 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 TTM

Days Sales Outstanding — — 20.43 28.11 22.16 22.65 24.39 22.23 20.61 42.87 66.68

Days Inventory — — 32.27 37.90 34.16 36.80 37.47 38.20 35.55 37.31 40.47

Payables Period — — 54.43 66.67 61.79 63.99 64.07 64.81 59.26 63.43 70.40

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Efficiency 2006-12 2007-12 2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 TTM

Cash Conversion Cycle — — -1.73 -0.65 -5.47 -4.54 -2.22 -4.39 -3.10 16.76 36.75

Receivables Turnover — — 17.86 12.99 16.47 16.12 14.97 16.42 17.71 8.51 5.47

Inventory Turnover — — 11.31 9.63 10.69 9.92 9.74 9.56 10.27 9.78 9.02

Fixed Assets Turnover — — 3.76 3.58 7.15 7.12 6.24 6.01 5.82 3.85 5.10

Asset Turnover — — 1.64 0.92 0.99 1.06 1.04 0.98 0.91 0.82 0.80

We value your feedback. Let us know what you think.

Module 4 Valuing

Part I

The P/E Ratio

The inverse of the P/E actually tells us……………………….

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And our formula for the return on an investment is:

So differences in P/E ratios implies……………………………

Operations for profit should be based not on optimism but on arithmetic.

Benjamin GrahamRefreshing on Present Value, Payments and Amortization

You have found a camel you really just must have! Which is the best deal? Why? Amortize all the deals.

Deal #1. Cost is $20,000, four equal payments which include interest at 4%. Payments begin one year from today. (Realistic rate is 12% for all the deals)

Deal #2 The camel costs $25,000, BUT you pay interest only at 4% for six years. With the last interest payment, you also pay the $25,000.

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Deal #3 The camel is $30,000, NO INTEREST for five years and then you pay the 30,000.

Deal #4 $17,000 cash.

Certainties are arrived at only on foot.

Kirch’s First Law of the Universe

The financial worth ______________________________________

________________________________________________________

(“First law valuation is a powerful tool. It should be on page #1.” John Ohsner, Financial Advisor and former student)

You have seen an ad for a used Mercedes in the Athens Messenger. The car is for sale for $40,000. You believe you could make a buck by renting the car out. You figure you could rent the car to the semi-rich on a daily basis for three years. You think you could rent the car for $100 per day for the first year and $80 per day the second year and $60 per day for the third year. You expect that the car will be rented out about 70% of the time for each year. At the end of the third year, you figure you can sell the car for $20,000. You estimate that the repairs and maintenance on the car will be about $1,000 for the first year, $2,000 the second year and $3,000 the third year. Licenses and fees will run $2,000 per year for all three years. You will pay a rental company 10% of the gross rents you receive each year to take care of all the paper work and the renting of the car to the students. How much can you pay for the car today and make 20% on your investment?

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Mercedes

Year 1 Year 2 Year 3

Rents 25,550

Cash Expenditures:

Repairs & Maintenance

Licenses & Fees

Rental Company Fees

Total Cash Expenditures

Net Cash Flow

The IRR What rate of return are you earning?

Use excel for instance =IRR(c15:f15)

The critical assumption

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Homework Module #4Once upon a time the following add appeared in the Athens newspaper-

For Sale: Apartment Building 30 UnitsAverage Rent for 2016 is expected to be $600 per month per unit2 years oldPrice __________

Upon investigation you found that it would require little or no work on your part. There was a rental agency which would keep the books, rent apartments, do evictions and other administrative tasks for 10% of the rent. Your investigation showed that the apartments stayed about 95% occupied and that occupancy rate is likely to continue. Additionally, the rental agency told you that you can expect rents to increase about 5% per year after 2016 year for the following three years (2017, 2018, and 2019) because the building is new. The repairs and maintenance costs are about $800 per month for 2016, 2017, 2018, and 2019. You want to earn at least 20% on your investment. You figure you will hold on to the apartment for four years and then sell it for $600,000 (on Dec 31, 2019). All other cash expenses run $1,000 per month and will rise at 5% per year after 2016. Assume it is Jan 1, 2016- what is the price you would pay for the apartment? Ignore taxes.

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Apartment2016 2017 2018 2019

Rents

Cash Expenditures: Rental Company Fees Repairs & Maintenance Other Cash ExpensesTotal Cash Expenditures

Net Cash Flow

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Module 5Risk and Terminal Value

The concept of terminal valueAnd if we expected the investment to last forever, how would we value it?

Go to the Apartment Building

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Apartment2016 2017 2018 2019

Rents 30(95%)(600)(12) 205,200 194,400 + 194,400(5%) 215,460 204,120 + 204,120(5%) 226,233 214,326 + 214,326(5%) 237,545

Cash Expenditures: Rental Company Fees 20,520 21,546 22,623 23,754 Repairs & Maintenance 9,600 9,600 9,600 9,600 Other Cash Expenses 12,000 12,600 13,230 13,892Total Cash Expenditures 42,120 43,746 45,453 47,246

Net Cash Flow 163,080 171,714 180,780 190,299

PV of Net Cash Flows @ 20% 135,900 119,246 104,618 91,772 = 451,536

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Can you actually beat the markets?If that sounds nutty, consider the emotion-driven mistakes that most of the rest of us make. For starters, most investors get scared when the market tanks and sell low before buying back high, sacrificing huge potential gains. As a result, the average stock investor has trailed the market average (Standard & Poor’s 500 index) by more than 4 percentage points over 20 years, according to Dalbar, the market research firm. Are the pros any better? Maybe not. Last year, 79 percent of so-called active fund managers, the pros who are supposed to be experts at picking stocks, failed to match their own benchmarks for market averages, according to Morningstar, the investment research company. http://www.ozy.com/rising-stars-and-provocateurs/to-get-rich-tell-your-emotions-to-shut-up/38678.article?utm_source=dd&utm_medium=email&utm_campaign=01192015

First As to Market Efficiency (Shiller vs. Fama) Nobel Prize for Economics, 2013.

Forms of Efficiency

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George Soros 29% for 37 yearsEddie Lampert 29% for 18 yearsPeter lynch 29% for 18 YearsDavid Tepper 27% for 15 yearsWarren Buffett 21% for 40 years

Risk and ReturnI would like to take time to describe another aspect of investing-

risk versus return.

Say you have the option of putting your money in a federally insured bank earning less than 1%. This is our starting point and carries no risk. From this ultra-safe extreme we move up the investment spectrum. At the other end of the spectrum,

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Lower Level of Risk Higher

Low

er

R

etur

n

High

er

Federally US Insured Bank wins World Cup

Systemic risk unsystematic (idiosyncratic) risk (market) (individual stock or investment risk)

Variability

Sharpe Ratio

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CapM

the Capital Asset Pricing Model (CAPM).

where:

is the expected return on the capital asset

is the risk-free rate of interest such as interest arising from government bonds

(the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns, or

also ,

is the expected return of the market

is sometimes known as the market premium (the difference between the expected market rate of return and the risk-free rate of return).

is also known as the risk premium

Restated, in terms of risk premium, we find that:

which states that the individual risk premium equals the market premium times β.

Let’s Value some stocks

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TimingIt is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities. (Benjamin Graham)

If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume. (Benjamin Graham)

Module 6

The Role of the SEC and other Regulatory Bodies in the investment world

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Module 7

Managerial Element 1temerity Concentration comes out of

a combination of confidence and hunger.

(Arnold Palmer)

We have been studying Financial Accounting

Which deals with ___________________________________________

Managerial accounting is __________________________________________________

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Cost BehaviorWe sell Tasteys. They cost $90 to make and sell for $ 300 each. Our only other expenses are the rent of $300 per month, utilities of $100 per month and a $10 per unit sales commission we pay to the salespeople. We sold ten during the year.

Fixed Costs are

Variable Costs are

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Calculating Break-even

Target Profit

A Contribution Margin Statement

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“ The art of conversation lies in listening. ” — M alcolm Forbes

Your Club is thinking about having a dinner. They expect to charge about $30 per head. They need to rent a room in Baker for $300 (includes servers). In addition to the $300, Baker will charge you $10 per dinner. How many dinners must you sell just to break even? How many dinners must you sell to make a profit of $600?

Sarah sells cookies. She uses ingredients that cost $.20 per cookie and sells them for $.50 each. She

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pays her sales force a 10% commission on all cookies sold. She pays rent of $1,000 per month. Her other fixed costs are $2,000 per month. How many cookies must she sell to break-even? How many cookies does she need to sell to make $2,000 per month? Prepare a contribution margin statement at the level where she is making $2,000 per month.

Using the Contribution Margin%

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Gracie Company sells Dodds. The following is an income statement for a recent month.

Sales $250,000 Cost of goods sold 150,000 Gross Margin 100,000 Operating Expenses Salaries and commissions $42,000 Rent 18,000 Utilities 7,000 Other 3,000 70,000

Net Income $30,000

Gracie sells one product, Dodds at $20 each. Cost of goods sold is variable. A 10% sales commission, included in salaries and commissions, is the only other variable cost. Gracie tells you that the income statement is not helpful, for she cannot determine such things as the break-even point.

Redo the statement using the contribution margin format.

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What is the breakeven in units and dollars

Using the Contribution Margin%

Acme Company sells anvils and the following is per anvil

Unit Selling Price $20Variable Costs 12

Total fixed costs $ 400,000 Total volume 100,000 units

Prepare an income statement using the contribution margin format

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What is Acme’s Break Even point in units

In $

Now assume that Acme wants to make $1,000,000 per year. How many anvils does the company need to sell to accomplish this (in units and dollars).

The CFO of Garven Company provides the following per-unit analysis, based on a volume of 100,000 units

Selling Price $30Variable Costs $12

Fixed Costs 9 Total Costs 21 Profit per unit $ 9

Answer each of the following questions independent of your answers to the other questions

1) What total profit does Garven expect to earn?

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2) What would be the total profit at 110,000 units? (Be careful- they are fixed costs)

3) What is the break-even point in units?

4) Garven’s managers think they can increase volume to 120,000 units by spending an additional $ 60,000 on salespeople. What total profit would they earn if they make this move?

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5) Break-even using Contribution Margin %

Now go back to the Hot Dog Stand

You have decided to open a hot dog stand at the corner of Court and Union. The following is your opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she sells. (Dogs cost $.40 each- how do I know that?)

AssetsCash 5,000Inventory 10,000Cart 35,000 Total 50,000

Liabilities

Owners’ EquityCommon Stock 50,000

Retained Earnings -0-

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Total 50,000

Income Statement Using Contribution Margin Format

For the First Year Sales 60,000 Sales Cost of Sales 12,000 Gross Margin 48,000 Operating Expenses Wages 23,000 Other 10,000 Total Operating Expenses 33,000 Operating Income 15,000

How many hot dogs do you need to sell to break-even Per Year

Per Month Per Week Per Day Per Hour

Homework Managerial I (Module 7) Problem 1. Salmon Company makes Things. Things sell for $30 each and cost $10 each to make. Fixed costs are estimated to be $1,500,000 next year.

What is the breakeven point in units and sales dollars for Salmon based on the above information

How many Things must Salmon sell to make $1,200,000 next year?

Problem 2 Billy Bob’s has given you the following income statement for June 2013.

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Sales $ 500,000Cost of goods sold 300,000

Gross margin 200,000

Operating expenses: Salaries and commissions $ 80,000 Utilities 20,000 Rent 22,000

Other 18,000 Total operating expenses 140,000 Income 60,000

Billy Bob sells one product, a running shoe for $100 per pair. A 10% sales commission, included in Salaries and commissions is the only other variable cost. The manager tells you that this financial statement is not very helpful to her.

Redo the income statement using the contribution margin format.

For Billy Bob’s determine the break-even in sales dollars and in units

Learning Module #8

struthious Managerial Lazy people are always anxious sycophant Part 2 to be doing something. pugnacious Marquis De Vauvenargues

Susie is the new manager of Helming Clothing. The controller has given her the following information based on expected operations for the coming year.

Shirts Pants PulloversSelling Price $ 20 $ 30 $ 60Variable Costs 10 12 15Contribution Margin 10 18 45

Sales mix percentage, in dollar sales 50% 30% 20%

Total fixed costs are $1,189,000

What is the weighted average contribution margin%?

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What is the break-even in sales?

Prepare an Income Statement by product line at the breakeven pointShirts Pants Pullovers Total

Sales $1,025,000Variable Costs 512,500Contribution Margin

Fixed Costs 1,189,000

Net Income

At the break-even point, how many of each item will be sold?

Shirts Pants Pullovers

The CEO wants a profit of $800,000. Determine the sales needed to achieve this goal?

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The sales manager believes she can increase the sales of any of the three products by 20% by spending $25,000 in advertising on that product. Which product should she choose for the promotion?

Cleveland Cliffs produces three models of gel pens, regular, silver and gold. Price and costs of the three are as follows

Regular Silver GoldSelling Price $ 20 $ 30 $60Variable Costs 12 15 21

Monthly fixed costs are $600,000

Suppose the sales mix is Regular 50%, Silver 30% and Gold 20% What is the breakeven in sales dollars?

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How much must the total sales dollars be to make $300,000 per month?

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Freeland Company makes three products, Alpha, Beta, and Gamma

Below are the income statement for a recent month:

May Sales $160,000

Costs 120,000 Net Income 40,000

Selling price and cost data by product are as follows.Alpha Beta Gamma

Selling Price $40 $20 $10Variable costs 16 6 6Contribution margin 24 14 4

Sales mix (in dollars) 40% 40% 20%

1) Determine the break-even point in sales dollars

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2) Which product is most profitable per unit sold?

3) Which product is most profitable per dollar of sales?

4) What total sales dollars are needed to earn $70,000 per month, and how many units of each product will be sold at that sales level if the usual mix is maintained?

5) The sales manager believes that he could increase sales of Gamma by 10,000 units per month if more attention were devoted to it and less to Beta. Sales of Beta would fall by 2,000 units per month. What change in income would occur if this action were taken?

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6) June sales were $200,000 with a mix of 40% Alpha, 30% Beta and 30% Gamma. What was the income?

7) Suppose the company is currently selling 12,000 units of Gamma. Because this is the least profitable product, management believes it should be dropped from the mix. If Gamma is dropped, it is expected that sales of Beta would remain the same and those of Alpha would rise. By how much would sales of Alpha have to rise to maintain the same total income?

(Did you figure out that the fixed costs were $56,000? If yes, you are really good. If no, use the $56,000 as fixed costs anyway).

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Module 8 (Managerial 2) Homework

Problem 1. Jenkins company sells three different laundry baskets. The controller has prepared the following estimates for next year

A B CSelling Price $12 $20 $30Variable Costs 4 5 8

Estimated sales mix 60% 30% 10%

Estimated Fixed Costs $1,590,000

What is the weighted average contribution margin %?

How many of each of the laundry baskets does Jenkins have to sell for the company to make $2,000,000?

Problem 2

Aisha Exterminating Company performs a wide variety of pest control services. Aisha, the owner, has been examining the following forecasts for 2013.

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Type of Service Expected $ volume Contribution Margin %

Termites $480,000 60% Lawn Pests 360,000 50 Interior Pests 360,000 70

Total Fixed Costs are expected to be $560,000

1) What is the weighted average contribution margin %?

2) What profit does Aisha expect?

3) The actual sales mix turned out to be 20% termites, 30% lawn pests and 50% interior pests. Total actual sales were $1,200,000 and total fixed costs were $560,000. Determine the actual weighted-average contribution margin and the net income.

Learning Module #9

Managerial Part 3

The following data relate to the planned operations of BobKat Company before considering the changes described later.

Chair Table SofaSelling Price 120 400 600Variable Costs 40 160 360Annual volume 8,000 3,000 4,000

Fixed costs are $1,320,000 (if you dropped or changed your products these would not change).

1) What is the total profit expected to be?

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2) What will happen to profit if BobKat drops Sofa?

3) What will happen to profit if BobKat drops chairs, but is able to shift the facilities to making more sofas so that volume increases to 7,000 units? (Total fixed costs remain constant)

4) Variable costs per sofa include $60 for parts that the company now buys outside. The company could make the parts at a variable cost of $45. If it did this, it would have to increase fixed costs by $35,000 annually. What would happen to profits if the company makes the part?

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5) Bobkat has received a special order for 1,000 tables at $245 each. Capacity is sufficient to make the units, and sales at the regular price would not be affected. What will happen to profit if BobKat accepts the order?

Cost Allocation

Kreutzer’s Klutz Company sells backpacks, tote-bags and book-bags. The cost structure is as follows:Backpacks Tote-bags Book-bags

Selling Price $40 $32 $40Variable Costs 24 8 20

Sales Mix 60% 10% 30%

Additionally, the company spends $4,000 per year advertising Backpacks, $1,000 per year advertising Tote-bags, and $3,000 to advertise bookbags. All other administrative costs equal $112,000. Sales are $400,000.

What is the breakeven?

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Module 10 That was talking, this is doing. Doing is different than talking.

Curly Sue

Capital Budgeting Kreutzer Industries is introducing a new product expected to sell for $14 and to have variable costs of $7. The managers expect to sell 20,000 per year for 10 years. Making the product requires machinery that costs $400,000. Will last for 10 years, no salvage value and will increase annual fixed cash operating costs by $30,000. The machinery will be depreciated using the straight-line method. The tax rate is 30% and the required return is 12%Evaluate the feasibility of the project.

What is the expected increase in after-tax cash flows for the project?

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The Net Present Value

Payback

89

IRR

Using Excel

Colton Company makes high-quality workshoes. Its managers believe the company can increase productivity by acquiring some new machinery but are unsure whether it would be profitable. The machinery costs $ 1,000,000, has a five-year life with no salvage value, and should save about $ 400,000 in operating costs annually. The company uses straight-line depreciation and has a 40% income tax rate and a 12% required rate of return.


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Calculate the NPV of the project

What is the Payback?

What is the IRR?

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JD Company has the opportunity to introduce a new radio with the following expected results.Annual unit sales volume 300,000 Selling price per unit $60Annual cash fixed costs $ 4,200,000 Variable cost per unit $35

The product requires equipment costing $8,000,000 and having a four-year life with no salvage value. The company has a 12% hurdle rate. The tax rate is 40% and the company uses straight line depreciation.


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What is the NPV of the project?

What is the Payback?

What is the IRR of the project?

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Stowe Company has the following three investment opportunities.

A B CCost $70,000 $70,000 $70,000

Cash inflow by year

Year 1 $35,000 $35,000 $4,000Year 2 35,000 10,000 8,000Year 3 - 45,000 10,000Year 4 5,000 20,000 98,000Total 75,000 110,000 120,000

Rank the investment opportunities in order of desirability using (a) payback, (b) NPV and, (c) irr.For the NPV, use a hurdle rate of 16%.

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Gabriel company currently makes 200,000 large strawberry jars per year at a variable cost of $9.75. Equipment is available for $500,000 that will reduce the variable cost to $7.50 while increase cash fixed costs by $200,000. The equipment will have not salvage value at the end of its four-year life and will be depreciated using the straight-line method. Gabriel has a 30% tax rate and a 12% hurdle rate. Do it????

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Debbie Stickle owns a driving range. She present pays several high school students $.8 a bucket to pick up the golf balls that his customers hit. A salesperson has shown her a machine that will pick up balls at an a cash cost of $6,600 plus $.05 per bucket. The machine costs $10,000 and has a five year life. Debbie would us straight line depreciation. Volume for the driving range is 21,000 buckets per year. Debbie’s combined state and federal tax rate is 30%. She believes the appropriate discount rate is 16%.

Do it? Other factors??

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1The following page is a copy of a purchase agreement for a Dr. Kirch’s car. The second page has data for leasing the same car. Dr. Kirch financed the car at 2.9% over 60 months. Under these terms, was it better for him to purchase the car or should he have leased it? Support your answer with figures. While we don’t expect you to get this right off, but we do expect some effort, and if this is collected, it will be graded on effort.

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Dear Dave:

Here is a lease based on an in stock car that is within $175 of the price of the car you have on order. We did this because it is considerably simpler with the particular software that we employ to quote an in stock car. I have also attached your partial payment receipt. Thanks again for your business.

MSRP: $48,980.00

Sale price: $46,702.00

Use tax financed in lease: $1,513.89

Acquisition fee in lease: $1,095.00

36 months/15,000 miles $665.00

Due at signing $0

Purchase option at lease end $28,898.00 plus applicable sales tax

.25 (cents) per mile penalty for each mile over 45,000 (assuming vehicle is returned)

Turn in (disposition fee) : $595.00

Mit freundlichen Grüßen / with kind regards,

Stephen F.H. Revard

Master Certified Mercedes-Benz Representative

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Module Valuation- Part IIYou and Your Money

Stocks or Mutual Funds??

Remember 5% do!!!

Mutual Funds

Load vs. No-Load

Do expense ratios matter?

Manager tenure

Finding a Mutual Fund using a screener

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Module 4 Revenue Recognition

Revenue Recognition- other than just selling things! Basics

Revenue is Recognized When Delivery has occurred or services have been rendered

Price is fixed or determinable

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Collectability is reasonably assured

Your Company sells a $100 gift certificate.

And when it is used to buy a pair of pants that cost you $40.

On October 31, you purchased a three year subscription to a monthly magazine- “College Today”. You send them $180 and your subscription starts with the November issue. Here is the accounting on the books of “College Today” books.

October 31st

November 30

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December 31st

Presentation on Financial Statements

Consignment

Zhang Company makes a new special sandal called Flumbos. They cost $12.00 to manufacture and sell wholesale for $18.00. The retail price is $30 per pair. Zhang is having trouble finding stores to carry the sandal so they have agreed to put 1,000 pairs in Guber’s Goods Store on consignment.

Consignment is

Types

What about the risk

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“In-substance Consignment” vs. regular consignment

Zhang Company makes a new special sandal called Flumbos. They cost $12.00 to manufacture and sell wholesale for $18.00. The retail price is $30 per pair. Zhang is having trouble finding stores to carry the sandal so they have agreed to put 1,000 pairs in Guber’s Goods Store on consignment.

On Zhang’s Books On Guber’s Books

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Guber sold 500 pairs and remitted the money to Zhang

On Zhang’s Books On Guber’s Books

Construction Recognizing profits

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Percentage of Completion can be used

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Steven’s Construction Company contracted on June 30, 2014 to build a new high rise apartment building for Gabrielle Properties. The construction is expected to take three years. The contract price is $4,500,000. The contract included a retainage clause of 10% which will be paid on completion, and Gabrielle’s acceptance of the building. The following is a summary of the of the costs, billings and cash receipts for each year:

2015 2016 2017Costs To Date 1,000,000 2,916,000 4,050,000Estimated Cost to Complete 3,000,000 1,134,000 -0-Billings During Year 900,000 2,400,000 1,200,000 Cash Collections During Year 750,000 1,750,000 2,000,000

% of Completion

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Losses, Changes in Estimates

Go back to Stevens-

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Steven’s Construction Company contracted on January 1, 2015 to build a new high rise apartment building for Gabrielle Properties. . The construction is expected to take three years. The contract price is $4,500,000. The contract included a retainage clause of 10% which will be paid on completion, and Gabrielle’s acceptance of the building.

Now assume that 2015 goes as planned, but in 2016 you hit a snag. The actual costs to date are $2,000,000 and you still estimate that after that year, you will have $3,000,000 in costs to finish the project.

2015 2016 2017Costs To Date 1,000,000 2,000,000 3,000,000Estimated Cost to Complete 3,000,000 3,000,000 -0-Billings During Year 900,000 2,400,000 1,200,000 Cash Collections During Year 750,000 1,750,000 2,000,000

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Completed Contract

When ____________________________________________________

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What is this Zero Profit method??

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Installment SaleOn January 1, 2015, General Development Corporation acquired 100 acres of land in Florida for $10,000. They put $30,000 in infrastructure (roads and so forth) on the property. They broke the property into 400 quarter acre lots which they advertised for sale to at $2,600 per lot. During 2015 they sold 25 lots at an average price of $2,600. The terms were $100 down and the rest in 120 equal annual monthly payments of $27.76 which include interest at 6%. The Sales people get 10% of the sales price regardless of whether the buyer ultimately makes all the payments. Assume all purchasers made 6 payments during 2015. Assume this qualifies to be accounted for as an installment sale. Prepare all related journal entries for 2015.

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Cost Recovery-

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Colton Company sold stuff that cost $160,000 for $300,000 on January 1, 2015.

Cash collections were as follows

2015 $ 100,000

2016 $ 150,000

2017 $ 50,000

Prepare the Journal entries for the transaction and for the subsequent cash collections.

Homework

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Problem 1 You are building a building and accounting for the profit using the percentage of completion method. The contract is for $3,000,000. The total estimated costs are $2,400,000. In year 1, your costs were $600,000 and your billings were $900,000. In year two, your costs were $1,200,000 and the billings were $1,500,000. In year 3, costs were $600,000 and billings were $600,000.

Prepare journal entries for these transactions.

Module 13Deferred Taxes

Differences between Net Income and Taxable Income

T_________________________________ (could also be termed timing)

Such as

P________________________________

Such as

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Deferred tax liabilitiesDeferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense/unpaid liabilities, or income is accrued but not taxed until received. Examples of such situations include:

a company claims tax depreciation at an accelerated rate relative to accounting depreciation

a company makes pension contributions for which tax relief is provided on a paid basis, whereas accounting entries are determined in accordance with actuarial valuations

Deferred tax assetsDeferred tax assets generally arise where tax relief is provided after an expense is deducted for accounting purposes.Examples of such situations include:

a company may accrue an accounting expense in relation to a provision such as bad debts, but tax relief may not be obtained until the provision is utilized

a company may incur tax losses and be able to "carry forward" losses to reduce taxable income in future years..

An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be realized.

MACRS

M_______________ A_________________ C_________ R_____________ S___________

MACRS has the half year convention built into the tables. For all our problems we will assume that, for financial reporting, the company depreciates assets a full year during the year of acquisition and none in the year of disposition, unless the problem states otherwise.

Acme, Inc. purchased new computer software on January 1, 2016. The cost of the software was $84,000. It is expected that the software will last 4 years and then be worthless. The company uses straight-line depreciation for reporting purposes. The software is three-year property for tax purposes. Assume that Acme makes $510,000 annually before depreciation and taxes and that this is the only fixed asset the company has. Included in the $510,000 is $10,000 of municipal bond interest that the company receives each the year. Prepare the journal entries as they relate to depreciation and taxes for each of the years and post the deferred tax T accounts for each of the years. The corporate tax rate is 30%.

Accounting Tax

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Income before Depreciation and Taxes $ 510,000 $ 510,000

Depreciation Expense

Income before Permanent Differences & Taxes

Permanent Differences

Taxable Income

Tax Expense

Journal Entry for 2016

Now prepare the journal entries for the next three years. Assume the same earnings and permanent differences.

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MACRS GDS Property (General Depreciation System)

Property Class Personal Property (all property except real-estate)

3-year propertySpecial handling devices for food and beverage manufacture.

Special tools for the manufacture of finished plastic products, fabricated metal products, and motor vehicles

5-year property

Information Systems; Computers / Peripherals

Aircraft and parts (of non-air-transport companies)

Computers

Petroleum drilling equipment

Property with ADR class life of more than 4 years and less than 10 years

Certain geothermal, solar, and wind energy properties.

7-year property

All other property not assigned to another class

Office furniture, fixtures, and equipment

Property with ADR class life of more than 10 years and less than 16 years

10-year property Assets used in petroleum refining and certain food products

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Vessels and water transportation equipment

Property with ADR class life of 16 years or more and less than 20 years

15-year property

Telephone distribution plants

Municipal sewage treatment plants

Property with ADR class life of 20 years or more and less than 25 years

20-year propertyMunicipal sewers

Property with ADR class life of 25 years or more

Property Class Real Property (real estate)

27.5-year property Residential rental property (does not include hotels and motels)

39-year property Non-residential real property

Year

Depreciation Rate in % for Recovery Period3-year 5-year 7-year 10-year 15-year 20-year

1 33.33 20.00 14.29 10.00 5.00 3.7502 44.45 32.00 24.49 18.00 9.50 7.2193 14.81 19.20 17.49 14.40 8.55 6.6774 7.41 11.52 12.49 11.52 7.70 6.1775 11.52 8.93 9.22 6.93 5.7136 5.76 8.92 7.37 6.23 5.2857 8.93 6.55 5.90 4.8888 4.46 6.55 5.90 4.5229 6.56 5.91 4.462

10 6.55 5.90 4.46111 3.28 5.91 4.46212 5.90 4.46113 5.91 4.46214 5.90 4.46115 5.91 4.46216 2.95 4.46117 4.46218 4.46119 4.462

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Year

Depreciation Rate in % for Recovery Period3-year 5-year 7-year 10-year 15-year 20-year

20 4.46121 2.231

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For 2016, Kylie Company had income before taxes and depreciation last year of $500,000. Included in the other revenue section was $5,000 in municipal bond interest she received on Athens Municipal Bonds which the company owned. On January 1, 2016 she purchased a new goomahochie for $60,000. She estimates it will last two years and then be worthless. (For the uninformed, a goomachochie is used to produce goomies and is three-year property according to the IRS). She used straight-line depreciation to depreciate the goomahochie. During 2016 she paid fines of $20,000 for speeding. Her Bad Debt Expense for the year was $7,000. She actually wrote off $4,000 in accounts that she will never collect. In 2017, her fines were $6,000, her bad debt expense was 6,000 and she wrote off $7,000. She had municipal bond interest of $2,000. In 2018, her fines were $7,000, bad debt expense was $5,000, she wrote off ($7,000) and she had no municipal bond interest. In 2019, her bad debt expense was the same as her write offs, she had no fines or municipal bond interest. Prepare the journal entries for all of the years that relate to taxes. (Assume the same earnings each year before depreciation and a 30% tax rate and all taxes are accrued and then paid the following year.)

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Ruth just bought a new airplane - cost $600,000. She will use it to deliver stuffs for the next five years. At the end of the fifth year she expects it will be worthless. Ruth’s net income before depreciation and taxes for the year was $4,000,000. Her tax rate is 30%. Ruth uses the straight line method (half-year convention) when calculating depreciation for accounting purposes. For IRS purposes, the plane is considered five-year property. Assume the same earnings before depreciation and taxes for the next six years. Prepare all journal entries relating to depreciation and taxes for all five years.

What happens when tax rates change?

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Module 4Time Value of Money

You have a choice- $100 today, $107 in one year or $115 in two years. You do not need money today and the money is safe if you decide to take it later. How would you make this decision?

The idea of Opportunity Cost ________________________________________________________________

_______________________________________________________________

Present valueFirst, back to an easy future value problem, how much will you have in one year if you put $100 in the bank today and the bank pays interest compounded annually at 10%?

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How much do you need to put in the bank today to have $110 in one year if the bank pays interest at 10%, compounded annually?

What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually?

The formula for present value

Using the Calculator

How much will I have in 3 years if I put $1,000 in a bank which pays interest at 10% compounded annually?

2nd CLR TVM 1000 PV 3 N

10 I/Y CPT FV

How much will I have in 6 years if I put $1,000 in a bank which pays interest at 10% compounded quarterly?

2nd CLR TVM 1000 PV 24 N

2.5 I/Y CPT FV

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How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded annually?

2nd CLR TVM 1000 FV

3 N 10 I/Y CPT PV

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded semi-annually?

2nd CLR TVM 1000 FV

3 X 2= N 10÷2= I/Y

CPT PV

How about wanting $50,000 in 10 years bank pays interest 16% payable quarterly?

Or 2nd CLR TVM 50000 FV

10 X 4= N16÷4= I/Y CPT PV

The tutorials and instruction book for your calculator make some easy calculations very difficult. If you do one or two additional steps, it all becomes easy.First, some basics The third line of the calculator is the one we will be using the most.

N is the number of compounding periodsI/Y is the interest rate per compounding periodPV is the present valuePMT is the payment per periodFV is the future value

To set your decimal points2nd Format (bottom middle key)

Enter number of decimal points you want to use.Enter (top line second key)

Future Value Problems

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded annually?

1) 2nd clr tvm

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2) 100 PV 3) 1 N4) 10 I/Y 5) CPT FV FV = -110.00

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded semi-annually?

1) 2nd clr tvm2) 100 PV 3) 2 N4) 5 I/Y5) CPT FV FV = -110.25

Present Value Problems What is the present value of $1,000 to be paid to me in 2 years, bank pays interest annually at 10%.

2nd CLR TVM1000 FV2 N10 I/YCpt PV -826.45

What is the present value of $1,000 to be paid to me in 2 years, bank pays interest of 10% semi-annually?

2nd CLR TVM1,000 FV4 N5 I/YCpt PV -822.70 Payments

You want to buy a new car. The cost is $50,000. You make 5 equal annual payments which include interest at 10%. How much are the payments?

2nd CLR TVM50,000 PV5 N10 I/YCpt PMT -13,189.87

What would the payments be if they were monthly? 2nd CLR TVM

50,000 PV5X12 = N10/12 = I/YCpt PMT -1,062.35

Differential InterestBob will sell you a DooDad for $10,000 payable in 3 equal annual payments which include interest at 2%. The bank would charge you 10% for the same loan. How much are you really paying for the DooDad?

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2nd CLR TVM10,000 PV3 N2 I/YCpt PMT 10 I/YCpt PV 8,623.28

How much would you pay for a 10 year, 100,000 bond, 10% interest payable annually, to earn 8% interest?

2nd CLR TVM100,000 FV10 N.10 X 100,000 = PMT8 I/YCpt PV 113,420.16

You are buying a 10 year, $100,000 Note issued 5 years ago. The Note is being paid in equal annual payments which included interest at 10%. Current interest rates are 12%. The Note has exactly 5 years of payments left and you will get the first in 1 year. How much do you pay to earn 12%?

2nd CLR TVM100,000 PV10 N10 I/Y Cpt PMT5 N12 I/YCpt PV 58,666.07

Problems

1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank pays interest at 4% compounded annually?

2) Compounded semi-annually?

3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8%

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compounded annually?

4) What if you want $1,000,000 in 20 years at 12% compounded semi-annually?

5) Problem 4 compounded quarterly?

Annuities 8) How much do you need to put in the bank today so you can take out $100 per year

for each of the next two years? The bank pays interest at 12% compounded annually. You will make your first withdrawal exactly one year from today.

9) How about $1,000 per year for next 4 years, bank pays interest at 10% compounded annually?

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10)How much do you need to put in the bank today so you can take out $10,000 per year for the next five years? The bank pays interest at 8% compounded annually.

11)How about $100 for 10 years, same bank and interest?

12)How about $500 per year for the next 30 years, bank pays interest at 8%, compounded annually?

Module 4 Homework

Problem 5-1If I deposit $500 in the bank today and the bank pays interest of 6% compounded annually, how much will I have 3 years from today?

Problem 5-2If I deposited $2,000 in the bank today at 5%, how much would I have 8 years from today?

Problems 5-3If Mary deposits $200 in an account that pays interest annually at 12%, how much will she have in 2 years?

Problem 5-4If Mary deposits $200 in an account at12% that pays interest semi-annually, how much will she have in 2 years?

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ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY

Frederick Schiller Module 5

What built this country over time is tens of thousands of people who want to live better tomorrow than they did today and go to work on it.

Warren Buffett

Payments and amortizations

You are buying a Mercedes for $65,000. You pay $5,000 down and will pay the rest in five annual payments of $15,027.39 beginning one year from today. The payments include interest at 8%. Prepare an amortization schedule.

How did I get the payment amount?

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Down Payment 5,000.00 5,000.00 60,000.00

1 15,027.39_______________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

Go back to the Mercedes- how would we do monthly payments?.......




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Down Payment 5,000.00 5,000.00 60,000.00

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

6 ________________________________________________________

Sharon wants to buy a new red dress (which her dad and uncle think is way too short and too tight). The cost is $600, 10% down and the rest in 3 equal annual payments which include interest at 8%. How much are the payments? Prepare an amortization schedule.

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You want to buy a cow. Price is $10,000 to be paid $1,000 down and the rest in three equal annual installments which include interest at 10%. How much are the payments? Prepare an amortization schedule.

You have just purchased a new car for $40,000. You pay no money down and will make 60 equal monthly payments starting next month. The interest rate is 12% per year. Amortize the first three months of your loan. (Did you get $889.78 as your payments?)

And just because I didn’t know where else to put it…

Deferred Annuity

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You are planning on retiring in 30 years. You figure you will need about $200,000 per year to live on. If you plan to live 40 years after you retire, how much do you need to deposit today, if you put it in a mutual fund with an 8% annual return?

Go back to the last problem. How much do you need to put in per year to get to your goal?

Making the payments in installments

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Module 5 Homework

Problem 1

John wants to buy a new gas Barbeque. The cost is $659.98. He will have to pay for it with10% down and 5 equal annual payments that include interest at 10%. Calculate the payments. Amortize the payments.

Problem 2

You, on the other hand, want a new Jeep. The cost is $ 29,000. You pay 5% down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

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Problem 3

Megan has just purchased a new goat. The cost was $ 1,000. She paid 10% down and will pay the rest in 4 equal annual installments which include interest at 6%. Calculate her payments and prepare an amortization schedule

Problem 4You want to buy a bus. The cost is $769,000. You pay $69,000 down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Problem 5You have just had your first child. The grandparents want to pay for the child’s education at Ohio University. The child will enter OU in exactly eighteen years. The cost per year then is estimated at $60,000. The amount must be paid at the beginning of each of the four years. How much do the grandparents need to deposit today in an account paying 9% to accomplish the goal?

What if the grandparents are not wealthy and so want to make annual deposits. They will make the first one today. How much do the annual deposits need to be.

What if they wanted to make monthly deposits, again, first one today, into an account paying 9%?

Extra Calculator Problems

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Eric wants to buy a new Mercedes. The cost is $80,000. Eric will put 10% down and pay the rest in 5 equal annual payments which include interest at 8%. How much are the payments?

If Eric amortizes the above loan correctly, what would be the interest expense for the second year?

If Eric amortizes the loan correctly, what would be the principal balance after the third payment?

If Eric made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?




Heather hit the lottery!! She has the option of taking 560,000 today or 100,000 per year for the next 8 years, or $1,000,000 in ten years. If she can deposit her money at 8%, ignoring taxes, which deal should she take?

Extra Extra Calculator Problems

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Bob wants to buy a new Harley. The cost is $60,000. Bob will put 10% down and pay the rest in 3 equal annual payments which include interest at 8%. How much are the payments?

Amortize the loan

If Bob made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?



Module 6

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Now let’s put that Present Value stuff to work!!!

On January 1, 2016, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds for par. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/16)

How much does Lucky receive?

Amortize it

On January 1, 2016, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds. At the time of the issue, interest rates had risen to 10%. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/16)

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How much does Lucky receive?

Amortize the bond

What if the current interest rate was 6%?(Calculate issuance amount and amortize the bond)

What if the original Lucky note called for equal payments- everything else is the same.

How much would you pay to earn 8%

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Amortize it

How much would you pay to earn 6%?

Amortize it

Still lucky equal payments, How much would you pay to earn 6%

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Amortize it

Clarence Co. issues a $100,000 zero on 12/31/16, interest rate 10% per annum, bond is due in three years. How much do they get? Amortize it

Buying after issue, We are buying the Lucky 8% bond on January 1, 2018. The interest was paid yesterday and there are two years until it is due. We are buying the bond to yield 6%. How much do we pay?

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How about to earn 10%

What if the Lucky bonds had originally been equal payment bonds. How much will you pay to earn 6%, 8% and 10%. (First payment on bonds was make yesterday, you are buying them today).

Module 6 Homework

Problem 1

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Darby Company issues a $100,000 on 12/31/16, 15%, bond that matures in 5 years. Interest is paid on December 31st of each year. What would be the amount they receive given the following interest rates:

10% 15% 20%

Problem 2

Still Darby Company - How about an 8% zero issued on 12/31/16 due in 3 years, face amount of $100,000. How much would you pay? Amortize it.

Problem 3

Ryan Company issues a $100,000 zero coupon bond on 12/31/16. The face interest rate is 10% and the bond that matures in 4 years. How much would you pay to yield*:

8% 10% 14%

Amortize all three bonds

\Module 7

Remember these?

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Sam will sell you a Bopper for $8,000. No money down and 5% per year for five years. At the end of the fifth year, you send him both that year’s interest and the $8,000. You send him the 5% each year. How much are you really paying for the Bopper? (The bank would charge you 10% interest for a loan of this type). (Don’t forget the Second Law!)

T___________________________________________________

and it___________________________________________________!

Amortize it. Ending or Unpaid


BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

What if the Sam deal had been for five equal payments that included interest at 5%? Current rate for similar loans is 10%

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Amortize it. Ending


BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

What a deal!! Buddy will sell you an airplane for $250,000. $50,000 down and the rest in five equal easy payments which include interest at 5%. A realistic interest rate would be 10%. How much are you really paying? Record the purchase and prepare the amortization schedule. (How do you handle the down payment ____________________________________)

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Buddy wants to sell you a car. $20,000, no money down and you pay interest of only 4% for one year. At the end of the year along with your 4% interest, you pay Buddy $20,000 for the car. You think this is a heck of a deal because if you borrowed the money from a bank it would cost you 12%.

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What a deal? Or,.. how much are you really paying for the car? And Sam has offered you the same car for $18,000 cash - what to do, what to do............

Nick also wants to sell you a thing-a-ma-jig for $100,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the same

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item on sale for $85,000. If you bought the item for $85,000, you would have to borrow the money from the bank at 12%. Which is the better deal?

Buddy will sell you some carpet. $20,000. No money down and only 1% interest per year for two years. (You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $20,000 along with the interest. If you borrowed from the bank you would have to pay 12%- a heck of a deal... or is it? (How much are you really paying for the carpet?)

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You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payment beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Amortize the loan.

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Once upon a time…..Suzie had just graduated from medical school and was set to begin a five year ENT internship at a hospital in Pontiac Michigan. Interns earn comparatively little and Suzie was a little apprehensive about her money situation. When she arrived in Michigan, the housing market was such that she could buy a really nice condo for a really good price. The payments on the condo would be less than rent payments. The problem was the down payment and the furnishing. She decided that if she could borrow $100,000, she would be set. After her internship, her first year pay would be about $400,000 per year and she figured she could pay off the loan easily. Debbie, her sister was flush with cash and so Suzie approached her for a possible loan. Debbie’s money was currently sitting in the bank earning 2%. Suzie asked the bank what they would charge for a six year, interest only loan and they told her 10% per year. Debbie offered to loan her the money at 8%. The terms were that Suzie would pay 8% on December 31st of each year. Then with the sixth interest payment, Suzie would repay the $100,000. The note was signed and Suzie got her money and bought her house.

Time has passed, three interest payments have been made by Suzie on time. (The note would now be considered seasoned.) Debbie is about to have her fourth child, Colton, and wants to move. A new house would deplete her savings and so she decided to sell the Suzie note. She had just received the third payment of interest yesterday. Debbie called a loan broker, a company that specializes in selling debt such as this. They told her that notes such as hers currently earn 12%. So if Debbie sells the note so that it earns 12%, how much will she get?

Amortize the deal

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How about if you wanted to earn 8%? Amortize it.

What if the Suzie/ Debbie note was for 100,000 payable in six equal annual payments which included interest at 8% and you purchased it to yield 8%. How much would you pay?

Amortize it.

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Same problem, but now interest rates have changed and you purchase it to yield 12%. How much would you pay? Amortize it.

Sally wants to sell you a note. It is a $100,000, 12% note she bought at par (for face value) last year. The note was originally for seven years, is seasoned, and has four years to run, pays interest only annually and the principal due with the last payment in four years. She received last year’s interest on time yesterday. Current interest rate on this quality of note is 8%. If you buy the note to yield 8%, how much will you pay Sally?

Amortize your purchase of the Sally note.

How much would you pay Sally if current interest rates are 14%? Amortize it.

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Module 7 HomeworkProblem 1Colton wants to sell you a Bubble Guppie $89,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the same item on sale for $79,000. If you bought the item for $79,000, you would have to borrow the money from the bank at 8%. Which is the better deal?

Problem 2 Ryan will sell you a Thing for $30,000. No money down and only 1% interest per year for two years. (You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $30,000 along with the interest. If you borrowed from the bank you would have to pay 6%- a heck of a deal... or is it? (How much are you really paying for the Thing?)

Problem 3What if the original Sally note (around page 51) had called for seven equal payments including interest at 12% and now has four more years left to run. How much would you be willing to pay Sally if you wanted to earn

A) 8%? Amortize it.B) 14%? Amortize it.

Problem 4Doozer wants to sell you a note with a face value of $1,000,000. The face rate on the note is 10% and is payable in 4 equal payments which include interest at 10%. The note has four years left to run and is seasoned.

A. How much would you pay for the note to earn 12%? Amortize it.

B. How much would you pay for the note to earn 8%? Amortize it.

Problem 5You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payment beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Amortize the loan.

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Module 8

Now we are ready to put it all to together

You have seen an ad for a used Mercedes in the Athens Messenger. The car is for sale for $40,000. You believe you could make a buck by renting the car out. You figure you could rent the car to the semi-rich on a daily basis for three years. You think you could rent the car for $100 per day for the first year and $80 per day the second year and $60 per day for the third year. You expect that the car will be rented out about 70% of the time for each year. At the end of the third year, you figure you can sell the car for $20,000. You estimate that the repairs and maintenance on the car will be about $1,000 for the first year, $2,000 the second year and $3,000 the third year. Licenses and fees will run $2,000 per year for all three years. You will pay a rental company 10% of the gross rents you receive each year to take care of all the paper work and the renting of the car to the students. How much can you pay for the car today and make 20% on your investment?

161

Mercedes

Year 1 Year 2 Year 3

Rents 25,550

Cash Expenditures:

Repairs & Maintenance

Licenses & Fees

Rental Company Fees

Total Cash Expenditures

Net Cash Flow

162

Once upon a time the following add appeared in the Athens newspaper-

For Sale: Apartment Building 30 UnitsAverage Rent for 2016 is expected to be $600 per month per unit2 years oldPrice __________

Upon investigation you found that it would require little or no work on your part. There was a rental agency which would keep the books, rent apartments, do evictions and other administrative tasks for 10% of the rent. Your investigation showed that the apartments stayed about 95% occupied and that occupancy rate is likely to continue. Additionally, the rental agency told you that you can expect rents to increase about 5% per year after 2016 year for the following three years (2017, 2018, and 2019) because the building is new. The repairs and maintenance costs are about $800 per month for 2016, 2017, 2018, and 2019. You want to earn at least 20% on your investment. You figure you will hold on to the apartment for four years and then sell it for $600,000 (on Dec 31, 2019). All other cash expenses run $1,000 per month and will rise at 5% per year after 2016. Assume it is Jan 1, 2016- what is the price you would pay for the apartment? Ignore taxes.

163

Apartment2016 2017 2018 2019

Rents

Cash Expenditures: Rental Company Fees Repairs & Maintenance Other Cash ExpensesTotal Cash Expenditures

Net Cash Flow

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