1
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
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 / 49,000
Allowance for Doubtful Accounts / 1,000 / Retained Earnings / 324,000
Inventory / 80,000 / Sales / 410,000
Building / 200,000 / Cost of Goods Sold / 200,000
Equipment / 100,000 / Salary Expense / 50,000
Accumulated Depreciation / 20,000 / Rent Expense / 36,000
Security Deposit / 3,000 / Depreciation Expense / 10,000
Accounts Payable / 12,000 / Office Expense / 9,800
Salaries Payable / 4,000 / Bad Debt Expense / 200
Taxes Payable / 6,000 / Interest Revenue / 1,000
Note 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.
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
Accumulated Depreciation / 46,000
Advertising Expense / 19,000
Allowance for Doubtful Accounts / 2,000
Bad Debt Expense / 1,000
Building / 300,000
Cash / 116,000
Common Stock, $10 Par / 10,000
Cost of Goods Sold / 500,000
Depreciation Expense / 28,000
Equipment / 140,000
Interest Expense / 5,000
Inventory / 120,000
Notes Payable, Long-Term / 10,000
Paid in Capital / 270,000
Patent / 50,000
Preferred Stock / 10,000
Rent Expense / 75,000
Retained Earnings / 174,000
Sales / 825,000
Salaries Payable / 60,000
Salary Expense / 100,000
Tax Expense / 18,000
Taxes Payable / 9,000
Treasury Stock / 3,000
Utilities 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.
Accounts Payable / $ 60,000Accounts Receivable / 150,000
Accumulated Depreciation / 85,000
Advertising Expense / 8,000
Building / 200,000
Cash / 183,200
Common Stock / 20,000
Cost of Goods Sold / 460,000
Equipment / 100,000
Interest Expense
Insurance Expense / 9,600
2,400
Inventory / 62,000
Depreciation Expense / 46,000
Note Payable
Office Expense / 80,000
2,000
Paid In Capital
Rent Expense / 200,000
36,000
Retained Earnings / 280,200
Sales / 900,000
Salaries Payable
Salary Expense / 8,000
200,000
Security Deposit / 40,000
Tax Expense / 37,800
Taxes Payable / 12,000
Utilities 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.
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 3
Continuing with the Review
Types of Earnings Per Share
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
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?
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?
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?
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?......
Problems
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?
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
If Bob 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 $10,000,000 in the bank in thirty years. If the bank pays interest at 8% compounded semi-annually, how much does she need to deposit today to reach her goal?
Cindy wants to withdraw $10,000 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?
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?
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______!
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.
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
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%
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 3
Problem 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.
(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 / 83,000
Accumulated Depreciation / 46,000
Advertising Expense / 19,000
Allowance for Doubtful Accounts
Building / 3,000
Cash / 106,000
Common Stock / 300,000
Cost of Goods Sold / 500,000
Equipment / 140,000
Interest Expense / 5,000
Inventory / 120,000
Depreciation Expense / 28,000
Notes Payable, Long-Term / 10,000
Paid in Capital
Patent / 50,000
Rent Expense / 75,000
Retained Earnings / 171,000
Sales / 825,000
Salaries Payable / 60,000
Salary Expense / 100,000
Tax Expense / 18,000
Taxes Payable / 9,000
Utilities 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.