Navigating Financial Fundamentals: Capital, Expenses, and Tax Strategies

1. Follow the Money John Wright jcwright@bell.net

2. Phone Bill Stocks Interest Dividends Taxes Salaries Paper Clips??? Paper Clips

3. E$ Capital & Expense Expenses Interest Revenue Taxes Profit C$ Dividends Retained Earnings Capital Raised Capital

4. Revenues • Phone services – Local – LD • Internet – Service – Hosting • Contracts – Data – 800 – TV carriage - PBX • Satellite TV (Bell) Cable TV (Rogers) • TV Channels – CTV, etc • Cell phones (sales, rentals) • Salvage

5. Money Out • Buildings, Equipment, Automotive • Salaries & Pensions • Dividends & Interest • Office supplies • Taxes • Miscellaneous

6. Capital or Expense? • Capital • Big ticket items • Tracked individually • Buildings, Equipment, Automotive • Expense • Consumables • Gas, electricity, heating fuel • Small items (office supplies, tools, etc) • Salaries • Interest

7. Expenses – What? • Everything needed for the day to day operations – from paperclips to wages • Bond interest • Taxes • Depreciation • Interest during construction

8. Expenses – Where to? • First • General expenses • Interest • Depreciation • Second • Taxes (≈ 50%) • Third • Dividends • Retained earnings

9. Depreciation (1) • Scenario You graduate at the top of the class, walk into a $100k/year job, pay 30% income tax ($30k) and buy a $120k car • You have $70k to live on • IFthat nice Mr. Flaherty says you can depreciate your car over 10 years as a tax deduction ($120k/10 = $12k per year) Tax is 30% of $(100k-12k) = $26.4k • You have $73.6k to live on

10. Depreciation (2) • Example – Telephone Pole • Costs about $2,000 - including • Planning • Purchase • Placement • Life is 40 years • Depreciation is $2000/40 = $50 per year

11. Depreciation (3) $ • ‘Straight Line’ (fixed amount/year) t • ‘Capital Cost Allowance’ (fixed %/year) $ t

12. Depreciation (4) • There is a depreciation rate for every capital item (called assets) • They are all added up and deducted from revenue before taxes • Theoretically – If depreciation for an asset was banked, at the end of its life there would be enough money to replace it • Reality – The money is used as it comes in

13. Technological Change • Records kept by hand in ledgers, calculations by hand • Mechanical adding machines • Records kept on ’main-frame’ computers much of the calculation on adding machines • Electronic calculators • Today – Spread sheet on a PC

14. Interest During Construction $ • Example - A new C.O. in a new subdivision • From the time the land is purchased to the time the first call is made • Money is going out • Nothing is coming in • Interest on the money spent on the construction and for equipment is a pre-tax expense Install Equipment Start Building Buy land In service Time

15. Capital • Comes from: • Sale of stock • Issuance of bonds (debt) • Retained earnings • Used for: • Buildings, equipment, vehicles, etc (but not salaries, paper clips, gasoline or other consumables)

16. Stocks or Bonds? • Bond interest is an expense • $2 of revenue will pay off $2 of interest • Dividends are paid after tax • $2 of revenue will pay $1 in dividends • Tax rate is about 50% • Why not borrow instead of having to pay dividends? • If the % of debt (Debt Ratio) is too high, the bonds are downgraded and cost more

17. Barrhaven (1) • New community • First phones served from Nepean • Not practical to continue • Capacity of Nepean • Length of each loop • Decision – Build a new C.O.

18. Barrhaven (2) • Where to locate the C.O.? • What type? How big? • How many trunks to nearby C.O.s? • How many trunks for LD? • Fibre or copper to houses? • How many pairs per house/business? • Cables – Aeriel? Underground? Gauge? • Any remote distribution sites?

19. Barrhaven (3) • Start digging and building • Start laying cable • Install equipment and power plant • Cutover

20. Life Cycle Costs (1) Needed Good Factory Stock In Service Recycle • 7-State Model (reality about 20 states) • Each state has a cost, a time and probabilities of going to another state determined by statistical sampling Repair

21. Life Cycle Costs (2) • Statistical sampling used to determine • Cost associated with each state • Time in each state • Probability of going next to a given state (some are 0, some are 1, rest are calculated) • Run 1,000,000 sets through the model • Play “What if ???” • e.g. Trade higher first cost against repair cost

22. Technological Change • Old stuff • Few electronics • Components separable and replaceable • Usually went back into service • Modern stuff • Mostly electronics • Components not separable and repairable • Often junked or recycled

23. Balancing Acts • Stocks or Bonds • Pay dividends or retain earnings • Increase/decrease rates (lose/gain customers) • First cost against maintenance cost • Capital vs Labour • Etc.

24. Capital v Labour v

25. E$ Capital & Expense Expenses Interest Revenue Taxes Profit C$ Dividends Retained Earnings Capital Raised Capital

26. Follow the Money $