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Video instructions and help with filling out and completing Acquisition premium amortization

Instructions and Help about Acquisition premium amortization

Okay class I just did a video on the effective interest rate calculator use under the example of a discount now we're gonna do the same thing but in this case it's gonna be at a premium instead of a discount all right so my example is going to be the same we've got bonds a hundred thousand dollars worth of bonds at this corporation that's going to be selling okay these bonds are four-year bonds they're gonna pay interest annually and the contract rate is 10 percent once again the contract rate can also be called the the coupon rate the stated rate or the discount rate or the not the discount rate or the nominal rate the coupon stated or nominal rate I'm gonna call it the contract rate because that's what my textbook uses the market rate right now is 8 percent so when the contract rate is 10 percent but a bond at this risk level would normally sell at 8 percent then this bonds gonna sell at a premium okay because it's paying on interest at a higher rate so it's gonna sell above the $100,000 okay but we're gonna see that really these investors are willing gonna earn 8 percent and not 10 percent on these bonds okay so let's let's do this time line again let's value what these bonds are gonna sell for so first of all we've got to look at the cash flows the cash flows are the interest and then what it's going to pay out at the end the hundred thousand dollars so the interest is calculated by taking the contract rate or you may be using coupon standard or nominal rate taking this contract rate of 10% times 100,000 so the corporation will pay out $10,000 cash every year for four years that's what my timeline is doing here 1 year 2 year 3 or 4 and then it will also pay back the full bond amount of a hundred thousand at the end so this this right here is my cash flow so let's calculate what this is worth today year zero okay the the annuity this is an annuity $10,000 it's for payments equal time periods apart so equal amounts equal time periods apart is an annuity so we'll go to our tables it's the present value of an annuity president value of an annuity the interest rate will be the 8% because that's what this is gonna earn it's gonna sell it the 8% amount even though it's paying out at 10% is paying cash wise 10% people are only going to earn 8% on this so we're going to use interest at 8 and then the n number of periods is going to be 4 periods okay so when we go to the table our present value of annuity table it's going to be three point three one to one so that's three point three one two one so then times 10,000.

FAQ

What is amortized cost?
Basically depreciation is reduction in the value of tangible assets over its useful life and amortization refers to the process of spreading the cost of intangible assets over its estimated useful life.Thus amortized cost simply refers to that part of the cost of that intangible asset that is written off as amortization. This periodic process of repayment schedule with fixed amount in regular time frame helps in gradually writing off acquired intangible asset like patent, copyright, trademark etc from balance sheet to the income statement of the concern and eventually helps in recoupment of the invested money.To learn more log intohttp://commercepapers.com/Topics...
How does an SaaS business with a customer acquisition cost of 6-12x the monthly subscription price and a 15% month customer acquisition growth rate break even?
The other thing to consider are non CAC costs, which for a SaaS business is primarily Engineering. These need to be amortized over the customer base and it is that that will determine the overall company profitability assuming your CAC is reasonable ( 12months seems a common benchmark). You can get to profitability much quicker with Feature-as-a-Service (e.g. WhatsApp) than a more complex application.If you look at most SaaS companies though (e.g. Hubspot, Salesforce), they intentionally defer profitability in order to plough more investment back into customer growth. Amazon aren't SaaS, but do the same thing.It sounds paradoxical, but for an early stage company, profitability is not a great sign as the implication is that they could grow faster if they spent more, and most SaaS markets are winner takes all (well, most anyway), so there is a premium on growth. Of course at some stage, "normality" has to return and profit has to come back into the equation.
Did Microsoft overpay for the Skype acquisition?
History will tell if Microsoft overpaid, but the fits are far too natural to deny.  Every asset Microsoft has offers touchpoints for Skype:  phones, computers, forthcoming tablets, XBOX/Kinect, Lync, Exchange, the list goes on and on.  Skype's customer base alone made them too hard for Microsoft to resist.   MSFT really was the perfect acquiror:  their reach and breadth is of a rare scale that allows for added room to expand Skype's revenue through these touchpoints.  Skype has a huge customer base that has yet to touch all of the above Microsoft products.  The overlap between Microsoft's and Skype's customers has real potential to mushroom. Another facet worth considering is that this move ties Facebook even more tightly to Microsoft, as the asset Facebook coveted is now owned by one of their biggest strategic partners and investors.  Microsoft is just as keen to keep Facebook away from partnering with Google, as Facebook was in trying to get ahead of Google by buying Skype.  With this deal, Facebook wins, Microsoft wins. Google...we'll see. Was there a premium paid over existing offers?  Likely.  That said, whoever purchased Skype was going to pay a premium.  I firmly beleive that Microsoft, above all others has the greatest upside for amortizing that premium quickly. On another note, recent history is in conflict with the notion that Microsoft will stop developing Skype for other platforms.  Skype already makes money from these other platforms and it makes no sense for Microsoft to shut off those spigots. Microsoft is actually being much more aggressive in embracing other platforms that can enhance its existing businesses. Case in point, the Azure toolkits for iOS and Android:http://www.zdnet.com/blog/micros...
What are the major operating expenses for eBay, Google, Amazon, etc.?
Running a large business gets expensive...Summary of Income Statement from Q1 2022 10Q.Cost of net revenue:  consist primarily of costs associated with payment processing, customer support, site operations and inventory. Significant components of these costs include bank transaction fees, credit card interchange and assessment fees, interest expense on indebtedness incurred to finance the purchase of consumer loans receivable by Bill Me Later, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.Sales and Marketing: consist primarily of advertising costs and marketing programs (both online and offline), employee compensation, contractor costs, facilities costs and depreciation on equipment. Online marketing expenses represent traffic acquisition costs in various channels such as paid search, affiliates marketing and display advertising. Offline advertising includes brand campaigns, buyer/seller communications and general public relations expenses.Product Development: consist primarily of employee compensation, contractor costs, facilities costs and depreciation on equipment. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our next generation platform architecture, migration of certain platforms, seller tools and Payments services projects. Capitalized site and product development General and Admin: consist primarily of employee compensation, contractor costs, facilities costs, depreciation of equipment, employer payroll taxes on employee stock-based compensation, legal expenses, insurance premiums and professional fees. Our legal expenses, including those related to various ongoing legal proceedings, may fluctuate substantially from period to period.
Is Berkshire Hathaway class B stock good value?
Berkshire is half insurance and investments, and half operations.This evaluation should not be construed as investment advice. Always do your own research.You can analyze Berkshire quite accurately using two different methods and see where they converge:Analyze it as a collection of assets, assuming those assets will earn roughly returns just above the risk-free rate. To do this, simply adjust the accounting book value up and down to arrive at the economic book value per share.Analyze it as a collection of operating companies, and determining it’s return on book value, and seeing if you’re willing to pay a premium on that book value.One small point: I will simply use the book value of the entire company, rather than per-share, even though per-share is more correct. This is just for simplicity of analysis, and the only assumption is that Berkshire will not be issuing more shares any time soon. I feel quite safe in this assumption.First - a collection of assets:Total book value of Berkshire is $286B. There are lots of adjustments to be made, such as amortization of goodwill, float value as debt, and acquisitions recorded at book value but worth more than book value.I usually look for a conservative, near-minimum value to decide if something is a good deal, so there’s no need to make an exhaustive list of adjustments.Here’s the big ones that definitely need to be made:Insurance float is $91B, and 100% of it is recorded as a liability. However, as long as premiums can continue to be written at the rate that policies expire (or decrease very slowly), this debt almost never has to be paid back.Suppose that in a tragic situation, Berkshire’s float starts to decrease in size, eventually reaching $0 in 30 years (premium-as-debt fully repaid). Assume a discount rate of 4% (hypothetical annual return, which is quite conservative as it’s not much more than a 30-year AA bond).That means the present value of a $91B liability is actually only $28B in present day dollars. So we can write down the liabilities by $63BBurlington Northern is conservatively worth 2x what Buffett paid for it (UNP stock prices have nearly tripled since then, but I want to be conservative). Write up the asset by $35BDoing the same for Lubrizol, Marmon, warrants in Goldman and Bank of America, again conservatively, I will add another $15B to assets.I won’t write up GEICO’s book value, because the $63B liabilities write down represents the 0-cost overall float operations of all insurance subsidiaries at Berkshire, including GEICO.There’s a lot more that could be adjusted, but they would be ticky-tack (like, writing up See’s Candy by 5–6x, amongst others. I’ll assume there’s a few billion there, but it may balance out with a few billion amongst the smaller acquisitions which won’t pan out.I will assume the event of an immediate 20% stock market decline and write down the entire equity portfolio, including Heinz (even though it’s accounted for differently) by $25B, for conservativeness sake.So the economic book value is $286B +$63B + $35B + $15B - $25B = $374B as the basement value for Berkshire Hathaway. This translates to $152 per B share.Second, as a collection of operating companies:Berkshire earns roughly $2B in cash a month from its operating units - after accounting for maintenance capex, which is capex for the purpose of simple maintenance, in excess of the depreciation amount. That’s just my estimation that roughly 40% of Berkshire’s capex is maintenance in excess of depreciation.Next, remove the equity component of its investment instruments, since we’re looking at operations only.Assets are: $120B in stock equity, $70B in cash and equivalents, $15B in Heinz, $23B in bonds = $228B; taking into account an immediate 20% drop in the equities market, we still have about $203B in assets.Liabilities funding these investment assets are: $70B payable insurance premiums, $16 in unearned premiums, $16B in insurance benefits payable, ~$5B in non-operations borrowing = ~$107This means that there’s about $96B worth of equity funding the investment portfolio. Subtract this from the $420B market capitalization and purchasing Berkshire at this price would be paying $324B for $25B per year of cash, which is 7.7%.If you wanted to make 10% cash flow, then the absolute bottom basement price you should pay is $132 per B share. But with (I think) a permanent decrease in the real risk-free rate, 8% is probably as good as any asset will ever earn. That would equate a price of $166 per B share. 8% yield is also what Buffett bought Lubrizol at, incidentally.So let's look at the two values we derived: $156 bottom basement price from asset valuation, and $166 from operations cash flow valuation.At this point, I would be comfortable saying $160 per B share would be a very conservative price to pay. Currently the price is $172, in a market that is quite expensive.So I would start buying at this price, and buy aggressively if it ever got below $160.I’ve been buying Berkshire B shares since it was $72, and I don’t see any reason to stop at this level, because the book value has more than doubled since then as well.This evaluation should not be construed as investment advice. Always do your own research.
With regards to EBITDA, it seems Depr and Amort are considered as line items in SG&A. Why SG&A? Why not COGS?
These expenses are excluded for the purpose of comparing different company's performances on the same basis. Depreciation is the result of capital expenditure, therefore is excluded from COGS and SG&A so as to compare companies with different capital structures. Likewise, amortisation is the result of goodwill from acquisition and is therefore excluded since it is a non operating expense.These expenses are not directly related to inventory costs and and are not proportionally related to revenue from inventory, therefore should not be included in COGS. These expenses are only indirectly related to inventory such as purchase of manufacturing equipment or premium paid for acquiring a good brand or facility when buying a business.
Does GAAP use historical cost for balance sheets?
It depends the account.I’ll run through some basic accounts and concepts. You should definitely refer to some more robust texts for a full description of treatments (including on consolidation / acquisition), rules, and intricacies. Cost is considered the most conservative and observable value of valuation alternatives, unless an exception must be applied.Cash - yes.Accounts receivable - cost. However, if there is a likelihood that an account will not be collected it will be written down and the balance sheet value reduced.Inventory - Cost, unless it needs to be devalued. This one can get complex by examining and comparing the cost to a salvage type value, sale less normal profit, and choosing a more conservative estimate if required.PP&E - Cost. However, if the business is a real estate firm or manufactures heavy machinery, in your mind you can think of that more as inventory instead of PP&E.Intangibles and goodwill. Intangibles can be amortized over a useful life while goodwill is not, unless there is an impairment.Accounts payable - cost.Bank debt - cost. Remember this will not be the NPV or the market price of a bond. But a premium / discount to go from the issue price to the face value is possible and amortized over the bond term.Equity - cost, but this has a lot of puts and takes, including but not limited to pension adjustments and currency adjustments. A preferred stock with a conversion feature will be at cost but could have a dividend that accrues, raising the book value of the preferred. If the conversion becomes likely, treatment will be different. These convertible preferred securities are seen more in the venture capital / micro-cap areas of capital.
Is it a good strategy to invest in shares with a market price that is less than their book value?
Not at all.Days are gone when stock market was ruled by industrialist companies.They own lands, machines, plants etc which are comprised in book value of a company.For every additional output, they need equivalent inputs and labour.But nowadays stock is ruled by tech companies. They don't need big machines, transportation networks, vehicles etc.The whole business is digitally managed. Companies don't need additional capital to expand their business.So the valuation context changed with market trends.To be more precise, a company with lower book value may be a great pick (if operates in low capital intensive business) and a company with higher book value may stink (vice versa).So you can only factor book value if comparing similar sector companies. If sectors differ, no relevancy of book value.Stocks like PFC, REC have very high book value (compared to price) but are still struggling to provide better returns. And banking stocks are trending up and up even after having very low book value to price ratio.So don't give much weightage to book value.
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