2015 11

Follow the MoneyFollow the Money

John WrightJohn Wright

jcwright@bell.netjcwright@bell.net

2015 22

Phone Bill Stocks Interest

SalariesTaxesDividends

Paper Clips Paper Clips???

2015 33

How

big

is B

CE

?H

ow b

ig is

BC

E?

Total Revenues• 2008 $14.98 billion• 2013 $18.18 billion

% Revenue% Revenue 20082008 20132013

WirelessWireless 3030 3232

TelevisionTelevision 1010 1111

MediaMedia 00 1313

Internet/Wireline DataInternet/Wireline Data 2929 2626

Wireline VoiceWireline Voice 3131 1818

31% of 15 = $4.65 b 18% of 18.2 = $3.28 b

2015 44

Tw

o F

unda

men

tals

Tw

o F

unda

men

tals 1 The difference between

“Capital” and “Expense”

2 Depreciation

Both are deceptively simple, but …

2015 55

Cap

ital &

Exp

ense

Cap

ital &

Exp

ense Expense

•Cost of running the business•Salaries, pensions, gas, paper clips, etc

•Deducted from income before taxes are paid

Capital•Cost of expanding the business•Land, buildings, equipment, cables, etc.

•Paid from monies on which taxes have been paid, or money raised

2015 66

Cap

ital &

Exp

ense

Cap

ital &

Exp

ense

E$Revenue

Raised Capital

Expenses

Taxes

Profit

Retained Earnings

CapitalC$Dividends

Interest

2015 77

Rev

enue

sR

even

ues

Phone services – Local – LDPhone services – Local – LD

Internet – Service – HostingInternet – Service – Hosting

Contracts – Data – 800 – Contracts – Data – 800 – TV carriage - PBXTV carriage - PBX

Satellite & FIBE TV (Bell) Satellite & FIBE TV (Bell) Cable TV (Rogers)Cable TV (Rogers)

TV Channels – CTV, etcTV Channels – CTV, etc

Smartphones (sales, rentals)Smartphones (sales, rentals)

SalvageSalvage

2015 88

Mon

ey O

utM

oney

Out Buildings, Equipment, Buildings, Equipment,

AutomotiveAutomotive

Salaries & PensionsSalaries & Pensions

Dividends & InterestDividends & Interest

Office suppliesOffice supplies

TaxesTaxes

MiscellaneousMiscellaneous

2015 99

Cap

ital o

r E

xpen

se?

Cap

ital o

r E

xpen

se?

CapitalCapital– Big ticket itemsBig ticket items– Tracked individuallyTracked individually– Buildings, Equipment, AutomotiveBuildings, Equipment, Automotive

ExpenseExpense– ConsumablesConsumables

Gas, electricity, heating fuelGas, electricity, heating fuel

– Small items (office supplies, tools, etc)Small items (office supplies, tools, etc)– Salaries Salaries – InterestInterest

2015 1010

Exp

ense

s –

Wha

t?E

xpen

ses

– W

hat? Everything needed for the day to day Everything needed for the day to day

operations – from paperclips to wagesoperations – from paperclips to wages

Bond interestBond interest

TaxesTaxes

DepreciationDepreciation

RentsRents

Interest during constructionInterest during construction

2015 1111

Exp

ense

s –

Whe

re to

?E

xpen

ses

– W

here

to? FirstFirst

– General expensesGeneral expenses– InterestInterest– DepreciationDepreciation

SecondSecond– Taxes (Taxes (≈ 50%)

ThirdThird– DividendsDividends– Retained earningsRetained earnings

2015 1212

Dep

reci

atio

n (1

)D

epre

ciat

ion

(1) ScenarioScenario

You graduate at the top of the class, walk You graduate at the top of the class, walk into a $100k/year job, pay 30% income tax into a $100k/year job, pay 30% income tax ($30k) and buy a $120k car($30k) and buy a $120k car

– You have $70k to live onYou have $70k to live on

IFIF that nice Mr. Oliver says you can that nice Mr. Oliver says you can depreciate your car over 10 years as a tax depreciate your car over 10 years as a tax deduction deduction ($120k/10 = $12k per year)($120k/10 = $12k per year)

Tax is now 30% of $(100k-12k) = $26.4kTax is now 30% of $(100k-12k) = $26.4k– You have $73.6k to live onYou have $73.6k to live on

2015 1313

Dep

reci

atio

n (2

)D

epre

ciat

ion

(2)

Example – Telephone PoleExample – Telephone Pole

Costs about $2,000 - includingCosts about $2,000 - including– PlanningPlanning– PurchasePurchase– PlacementPlacement

Life is 40 yearsLife is 40 years

Depreciation is $2000/40 = $50 per yearDepreciation is $2000/40 = $50 per year

2015 1414

Dep

reci

atio

n (3

)D

epre

ciat

ion

(3) ‘‘Straight Line’ (fixed amount/year)Straight Line’ (fixed amount/year)

‘‘Capital Cost Allowance’ (fixed %/year)Capital Cost Allowance’ (fixed %/year)

$

$

t

t

2015 1515

Dep

reci

atio

n (4

)D

epre

ciat

ion

(4)

There is a depreciation rate for every capital There is a depreciation rate for every capital item (called assets)item (called assets)

They are all added up and deducted from They are all added up and deducted from revenue before taxesrevenue before taxes

Theoretically – If depreciation for an asset Theoretically – If depreciation for an asset was banked, at the end of its life there would was banked, at the end of its life there would be enough money to replace itbe enough money to replace it

2015 1616

Dep

reci

atio

n (5

)D

epre

ciat

ion

(5)

Why bother?Why bother?Depreciation allows a portion of the Capital Depreciation allows a portion of the Capital cost to be charged as Expense each year it is cost to be charged as Expense each year it is in service.in service.The total Expense is INCREASED by the The total Expense is INCREASED by the amount of Depreciationamount of DepreciationTherefore the amount on which taxes are paid Therefore the amount on which taxes are paid is DECREASED, hence – lower tax billis DECREASED, hence – lower tax bill

2015 1717

Tec

hnol

ogic

al C

hang

eT

echn

olog

ical

Cha

nge Records kept by hand in ledgers, Records kept by hand in ledgers,

calculations by handcalculations by hand

Mechanical adding machinesMechanical adding machines

Records kept on ’main-frame’ Records kept on ’main-frame’ computers much of the calculation on computers much of the calculation on adding machinesadding machines

Electronic calculatorsElectronic calculators

Today – Spread sheet on a PCToday – Spread sheet on a PC

2015 1818

Inte

rest

Dur

ing

Con

stru

ctio

nIn

tere

st D

urin

g C

onst

ruct

ion

Example - A new C.O. in a new subdivisionExample - A new C.O. in a new subdivisionFrom the time the land is purchased to the time From the time the land is purchased to the time the first call is madethe first call is made– Money is going outMoney is going out– Nothing is coming inNothing is coming in

Interest on the money spent on land, building and Interest on the money spent on land, building and equipment is a pre-tax expenseequipment is a pre-tax expense

$

Time

Buy landStart

Building

InstallEquipment

In service

2015 1919

Cap

ital

Cap

ital

Comes from:Comes from:– Sale of stockSale of stock– Issuance of bonds (debt)Issuance of bonds (debt)– Retained earningsRetained earnings

Used for:Used for:– Buildings, equipment, vehicles, etc (but Buildings, equipment, vehicles, etc (but

not salaries, paper clips, gasoline or not salaries, paper clips, gasoline or other consumables)other consumables)

2015 2020

Sto

cks

or B

onds

?S

tock

s or

Bon

ds? Bond interest is an expenseBond interest is an expense

– $2 of revenue will pay off $2 of interest$2 of revenue will pay off $2 of interest

Dividends are paid after taxDividends are paid after tax– $2 of revenue needed to pay $1 in dividends$2 of revenue needed to pay $1 in dividends

Tax rate is about 50%Tax rate is about 50%

Why not borrow instead of having to pay Why not borrow instead of having to pay dividends?dividends?

If the % of debt (Debt Ratio) is too high, the If the % of debt (Debt Ratio) is too high, the bonds are downgraded and cost morebonds are downgraded and cost more

2015 2121

Bar

rhav

en (

1)B

arrh

aven

(1) New communityNew community

First phones served from NepeanFirst phones served from Nepean

Not practical to continueNot practical to continue– Capacity of Nepean Capacity of Nepean – Length of each loopLength of each loop

Decision – Build a new C.O.Decision – Build a new C.O.

2015 2222

Bar

rhav

en (

2)B

arrh

aven

(2) Where to locate the C.O.?Where to locate the C.O.?

What type? How big?What type? How big?How many trunks to nearby C.O.s?How many trunks to nearby C.O.s?How many trunks for LD?How many trunks for LD?Fibre or copper to houses?Fibre or copper to houses?How many pairs per house/business?How many pairs per house/business?Cables – Arial? Underground? Gauge?Cables – Arial? Underground? Gauge?Any remote distribution sites?Any remote distribution sites?

2015 2323

Bar

rhav

en (

3)B

arrh

aven

(3) Start digging and buildingStart digging and building

Start laying cableStart laying cable

Install equipment and power plantInstall equipment and power plant

CutoverCutover

2015 2424

Life

Cyc

le C

osts

(1)

Life

Cyc

le C

osts

(1)

7-State Model (reality about 20 states)7-State Model (reality about 20 states)Each state has a cost, a time and Each state has a cost, a time and probabilities of going to another state probabilities of going to another state determined by statistical samplingdetermined by statistical sampling

Needed Good

Recycle

Repair

In ServiceStockFactory

2015 2525

Life

Cyc

le C

osts

(2)

Life

Cyc

le C

osts

(2) Statistical sampling used to determineStatistical sampling used to determine

– Cost associated with each stateCost associated with each state– Time in each stateTime in each state– Probability of going next to a given state (some Probability of going next to a given state (some

are 0, some are 1, rest are calculated)are 0, some are 1, rest are calculated)

Run 1,000,000 sets through the modelRun 1,000,000 sets through the model

Play “What if ???”Play “What if ???”– e.g. Trade higher first cost against repair coste.g. Trade higher first cost against repair cost

2015 2626

Tec

hnol

ogic

al C

hang

eT

echn

olog

ical

Cha

nge Old stuffOld stuff

– Few electronicsFew electronics– Components separable and replaceableComponents separable and replaceable– Usually went back into serviceUsually went back into service

Modern stuffModern stuff– Mostly electronicsMostly electronics– Components not separable and Components not separable and

repairablerepairable– Often junked or recycledOften junked or recycled

2015 2727

Bal

anci

ng A

cts

Bal

anci

ng A

cts

Stocks or BondsStocks or BondsPay dividends or retain earningsPay dividends or retain earningsIncrease/decrease rates Increase/decrease rates (lose/gain customers)(lose/gain customers)First cost against maintenance costFirst cost against maintenance costCapital vs LabourCapital vs LabourEtc.Etc.

2015 2828

Cap

ital v

Lab

our

Cap

ital v

Lab

our

v

2015 2929

Cap

ital &

Exp

ense

Cap

ital &

Exp

ense

E$Revenue

Raised Capital

Expenses

Taxes

Profit

Retained Earnings

CapitalC$Dividends

Interest

2015 3030

$ Follow the MoneyFollow the Money