Corporate repurchase

A corporation's repurchase of stock or bonds it has issued. In the case of stocks, this reduces the
number of shares outstanding, giving each remaining shareholder a larger percentage ownership of
the company. This is usually considered a sign that the company's management is optimistic about
the future and believes that the current share price is undervalued. Reasons for buybacks include
putting unused cash to use, raising earnings per share, increasing internal control of the company,
and obtaining stock for employee stock option plans or pension plans. When a company's
shareholders vote to authorize a buyback, they aren't obliged to actually undertake the buyback.
also called corporate repurchase.

Read more: http://www.investorwords.com/639/buyback.html#ixzz32VDJkMnT

Definition of
'Sinking Fund'

A means of repaying
funds that were
borrowed through a
bond issue. The
issuer makes
periodic payments to
a trustee who retires
part of the issue by
purchasing the
bonds in the open
market.

Investopedia explains 'Sinking Fund'

Rather than the issuer repaying the entire principal of a bond issue on the
maturity date, another company buys back a portion of the issue annually
and usually at a fixed par value or at the current market value of the
bonds, whichever is less. Should interest rates decline following a bond
issue, sinking-fund provisions allow a firm to lessen the interest rate risk
of its bonds as it essentially replaces a portion of existing debt with
lower-yielding bonds.

From the investor's point of view, a sinking fund adds safety to a


Looks like Company profits both ways-
1) Interest rates rise bonds less expensive. Company buys back the low price bonds.
2) Interest rates fall bonds more expensive. Company pays slightly more than face value

Definition of 'Preferred Stock'

A class of ownership in a corporation that has a higher claim on the assets and earnings than
common stock. Preferred stock generally has a dividend that must be paid out before dividends
to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation.
However, the best way to think of preferred stock is as a financial instrument that has
characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as
"preferred shares".

Definition of 'Treasury Stock (Treasury Shares)'

The portion of shares that a company keeps in their own treasury. Treasury stock may have come
from a repurchase or buyback from shareholders; or it may have never been issued to the public
in the first place. These shares don't pay dividends, have no voting rights, and should not be
included in shares outstanding calculations.
Treasury stock is often created when shares of a company are initially issued. In this case, not all
shares are issued to the public, as some are kept in the company's treasury to be used to create
extra cash should it be needed. Another reason may be to keep a controlling interest within the
treasury to help ward off hostile takeovers.

Alternatively, treasury stock can be created when a company does a share buyback and
purchases its shares on the open market. This can be advantageous to shareholders because it
lowers the number of shares outstanding. However, not all buybacks are a good thing. For
example, if a company merely buys stock to improve financial ratios such as EPS or P/E, then the
buyback is detrimental to the shareholders, and it is done without the shareholders' best
interests in mind.
corporate bond issue: with it, the issuing company is less likely to
default on the repayment of the remaining principal upon maturity since
the amount of the final repayment is substantially less. This added safety
affects the interest rate at which the company is able to offer bonds in the
marketplace.
Mortgage backed security

A type of asset-backed security that is secured by a mortgage or collection of mortgages. These
securities must also be grouped in one of the top two ratings as determined by a accredited
credit rating agency, and usually pay periodic payments that are similar to coupon payments.
Furthermore, the mortgage must have originated from a regulated and authorized financial
institution.
When you invest in a mortgage-backed security you are essentially lending money to a home
buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its
customers without having to worry about whether the customers have the assets to cover the
loan. Instead, the bank acts as a middleman between the home buyer and the investment
markets.

This type of security is also commonly used to redirect the interest and principal payments from
the pool of mortgages to shareholders. These payments can be further broken down into
different classes of securities, depending on the riskiness of different mortgages as they are
classified under the MBS.

Conversion Price
The price per share at which a convertible security, such as corporate bonds or preferred shares,
can be converted into common stock.
quotient of the principal value of the convertible security divided by the conversion price
The conversion price is determined when the convertible security is issued and can be found in
the bond indenture (in the case of convertible bonds) or in the security prospectus (in the case
of convertible preferred shares). The conversion price is essential in determining the number of
shares to be received, by computing the quotient of the principal value of the convertible
security divided by the conversion price. Usually, the conversion price is set at a significant
amount higher than the current price of the common stock, so as to make conversion desirable
only if a company's common shares experience a significant increase in value.
Convertible Bonds: Pros And Cons For
Companies And Investors
There are pros and cons to the use of convertible bonds as a means of financing by
corporations. One of several advantages of this delayed method of equity financing is a delayed
dilution of common stock and earnings per share (EPS). Another is that the company is able to
offer the bond at a lower coupon rate - less than it would have to pay on a straight bond. The
rule usually is that the more valuable the conversion feature, the lower the yield that must be
offered to sell the issue; the conversion feature is a sweetener.

Companies with poor credit ratings often issue convertibles in order to lower the yield necessary
to sell their debt securities. The investor should be aware that some financially weak companies
will issue convertibles just to reduce their costs of financing, with no intention of the issue ever
being converted. As a general rule, the stronger the company, the lower the preferred yield
relative to its bond yield.
Pros
There are also corporations with weak credit ratings that also have great potential for growth.
Such companies will be able to sell convertible debt issues at a near-normal cost, not because of
the quality of the bond but because of the attractiveness of the conversion feature for this
"growth" stock. When money is tight and stock prices are growing, even very credit-worthy
companies will issue convertible securities in an effort to reduce their cost of obtaining scarce
capital. Most issuers hope that if the price of their stocks rise, the bonds will be converted to
common stock at a price that is higher than the current common stock price. By this logic, the
convertible bond allows the issuer to sell common stock indirectly at a price higher than the
current price. From the buyer's perspective, the convertible bond is attractive because it offers
the opportunity to obtain the potentially large return associated with stocks, but with the safety
of a bond

1. Reduce cost of borrowing money
2. Reduce the dilution of EPS
3. Reduce the high coupon payments on the straight bonds. Reduce the financial burden on
the payment of big interests (reducing the burden of debt service)
4. Less negative signal than issuing the straight equity
5. Delayed action delayed equity. Hence less native reaction.

Disadvantages
There are some disadvantages for convertible bond issuers, too. One is that financing with
convertible securities runs the risk of diluting not only the EPS of the company's common stock,
but also the control of the company.
EPS can go down because of dilution- conversion increases the # of outstanding shares

Hedging
Let's see how this works with an example. Say you own shares of Cory's Tequila Corporation
(Ticker: CTC). Although you believe in this company for the long run, you are a little worried
about some short-term losses in the tequila industry. To protect yourself from a fall in CTC you
can buy a put option (a derivative) on the company, which gives you the right to sell CTC at a
specific price (strike price). This strategy is known as a married put. If your stock price tumbles
below the strike price, these losses will be offset by gains in the put option. (For more
information, see this article on married puts or this options basics tutorial.)

Futures Contract
The futures market is a centralized marketplace for buyers and sellers from around the world
who meet and enter into futures contracts. sPricing can be based on an open cry system, or bids
and offers can be matched electronically. The futures contract will state the price that will be
paid and the date of delivery
The profits and losses of a futures contract depend on the daily movements of the market for
that contract and are calculated on a daily basis. For example, say the futures contracts for
wheat increases to $5 per bushel the day after the above farmer and bread maker enter into
their futures contract of $4 per bushel. The farmer, as the holder of the short position, has lost
$1 per bushel because the selling price just increased from the future price at which he is
obliged to sell his wheat. The bread maker, as the long position, has profited by $1 per bushel
because the price he is obliged to pay is less than what the rest of the market is obliged to pay in
the future for wheat.
On the day the change occurs, the farmer's account is debited $5,000 ($1 per bushel X 5,000
bushels) and the bread maker's account is credited by $5,000 ($1 per bushel X 5,000 bushels).
As the market moves every day, these kinds of adjustments are made accordingly. Unlike the
stock market, futures positions are settled on a daily basis, which means that gains and losses
from a day's trading are deducted or credited to a person's account each day. In the stock
market, the capital gains or losses from movements in price aren't realized until the investor
decides to sell the stock or cover his or her short position.
As the accounts of the parties in futures contracts are adjusted every day, most transactions in
the futures market are settled in cash, and the actual physical commodity is bought or sold in
the cash market. Prices in the cash and futures market tend to move parallel to one another,
and when a futures contract expires, the prices merge into one price. So on the date either
party decides to close out their futures position, the contract will be settled. If the contract was
settled at $5 per bushel, the farmer would lose $5,000 on the futures contract and the bread
maker would have made $5,000 on the contract.

But after the settlement of the futures contract, the bread maker still needs wheat to make
bread, so he will in actuality buy his wheat in the cash market (or from a wheat pool) for $5 per
bushel (a total of $25,000) because that's the price of wheat in the cash market when he closes
out his contract. However, technically, the bread maker's futures profits of $5,000 go towards
his purchase, which means he still pays his locked-in price of $4 per bushel ($25,000 - $5,000 =
$20,000). The farmer, after also closing out the contract, can sell his wheat on the cash market
at $5 per bushel but because of his losses from the futures contract with the bread maker, the
farmer still actually receives only $4 per bushel. In other words, the farmer's loss in the futures
contract is offset by the higher selling price in the cash market - this is referred to as hedging.

Basis Risk
The risk that offsetting investments in a hedging strategy will not experience price changes in
entirely opposite directions from each other. This imperfect correlation between the two
investments creates the potential for excess gains or losses in a hedging strategy, thus adding
risk to the position.

Offsetting vehicles are generally similar in structure to the investments being hedged, but they
are still different enough to cause concern. For example, in the attempt to hedge against a two-
year bond with the purchase of Treasury bill futures, there is a risk that the Treasury bill and the
bond will not fluctuate identically.

Margin Account
A margin account is an account offered by brokerages that allows investors to borrow money to
buy securities. An investor might put down 50% of the value of a purchase and borrow the rest
from the broker. The broker charges the investor interest for the right to borrow money and
uses the securities as collateral.

The specific calculations as to how margin works get a little more complicated, but you can learn
about this in our Margin Trading tutorial.

The important thing to understand about margin is that it has consequences. Margin is leverage,
which means that both your gains and losses are amplified. Margin is great when your
investments are going up in value, but the double-edged sword of leverage really hurts when
your portfolio heads south. Because margin exposes you to extra risks, it's not advisable for
beginners to use it. Margin can be a useful tool for experienced investors, but until you get to
that point, play it safe.

Floating Rate Preferred Stock

A type of preferred stock where the dividends issued will vary with a benchmark, most often a
T-bill rate. The value of the dividend from the preferred share is set by a predetermined formula
to move with rates, and because of this flexibility preferred prices are often more stable then
fixed-rate preferred stocks.
The preferred category of stocks are more secure as they will be one of the first of the equity
holders to receive dividend payments in the event of the company's liquidation. There is often a
limit to the amount the rate can change on the dividend, adding further security to the issue.

Convertible Preferred Stock
Preferred stock that includes an option for the holder to convert the preferred shares into a
fixed number of common shares, usually anytime after a predetermined date.
Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes
there is a provision that allows the company (or issuer) to force conversion. The value of
convertible common stock is ultimately based on the performance (or lack thereof) of the
common stock.

Similarities between preferred stocks and convertible bonds
The market value of both instruments is affected by changes in interest rates. When
interest rates go up, prices for these investments (both with fixed payments) go down. The
effect is often less marked on preferred stock however.
Both exist in callable versions. For instance, when a preferred stocks fixed dividend is
greater than prevailing interest rates, a company may call the preferred stock and pay the
investor a pre-defined redemption price.
Preferred stock has priority over common stock for any payments due, and so do bonds.
However, bonds also have priority over preferred stock.
Preferred stock can often be converted into common stock, like convertible bonds can be
converted into common stock. In both cases, investors have a safety net of a minimum
income while the opportunity remains open for investors to profit from an upturn in the
overall worth of the issuing company.
Credit ratings apply to preferred stocks as to bonds. Ratings are lower for preferred stocks,
because they do not have the same guarantees as bonds.
Current yields for preferred stock are calculated as for bonds. Example: with a fixed
dividend of $1.80 and a market price of $30, a preferred stock has a current yield of 6%
($1.80/$30). As stock presents higher risk than bonds, the yield on preferred stock may be
set higher than for convertible bonds issued by the same company.

Differences between preferred stocks and convertible bonds
At the end of the day, preferred stock is still equity, while convertible bonds are still debt.
In other words, a company is not obligated to pay the preferred stock holders a dividend.
However, preferred stock holders must be paid all their dividends before common stock
holder receive a dividend.
Payments to investors holding preferred stocks cost the issuing company more per dollar
paid out, but are also subject to board approval by the company. Bond interest is paid out
before tax, making it less expensive, and is also an obligation that a company must respect.
Preferred stock may be more accessible to investors than bonds, because they tend to have
lower face values, compared to bonds with face values of around $1,000 and minimum
purchase requirements.
Debt is tax efficient than Preferred Stock
- See more at: http://www.learnbonds.com/convertible-bonds-vs-preferred-
stocks/#sthash.hKCnnbRh.dpuf

What is a Convertible Preferred Stock?
In most cases, convertible preferred stocks are similar to convertible bonds and respond accordingly in the
market place. However, there are some differences between the two.

In most instances, a preferred stock is a perpetual instrument and, as such, does not mature. Its liquidation
valuethe stated value of the preferred stock at redemptionis an option of the issuing company. Preferred
stocks rank ahead of common stocks, but below more senior obligations of the company, that is debt obligations.
Therefore, holders of preferred shares will be paid before common shareholders. Dividends on preferred stocks
are usually paid in quarterly amounts. However, dividends on preferred stocks are not secured and may be
omitted. While corporations are required to pay interest on convertible bonds, they are not required to pay
preferred dividends. Dividend payments are voted at the convenience of the company. But many preferred issues
provide provisions for cumulative payments. That is, the corporation is obliged to make up omitted payments
before it may distribute dividends to common stock holders. Furthermore, missed dividend payments give
preferred shareholders the right to elect directors to the companys Board of Directors. In general, preferred
dividends are paid regularly.
If a convertible preferred stock trades on an exchange, its notation will be similar to a common stock.
Convertibility is not generally indicated. However, prices shown are actual prices at which the preferred has
traded, and not a percentage of par. Also, dividends shown are actual dollar amounts and not a percentage of
par. For example, the Newell Financial $2.625 preferred pays an annually dividend of $2.625.
Whereas convertible bonds are debt instruments for a corporation, preferreds are considered equity. Convertible
preferreds are generally protected against dilution. In addition, some preferreds may enjoy several added
features. For example, the dividend on the common is increased above a certain level, if the preferred dividend
would also be increased.

What is the difference between forward and futures contracts?
Fundamentally, forward and futures contracts have the same function: both types of contracts
allow people to buy or sell a specific type of asset at a specific time at a given price.

However, it is in the specific details that these contracts differ. First of all, futures contracts are
exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other
hand, are private agreements between two parties and are not as rigid in their stated terms and
conditions. Because forward contracts are private agreements, there is always a chance that a
party may default on its side of the agreement. Futures contracts have clearing houses that
guarantee the transactions, which drastically lowers the probability of default to almost never.

Secondly, the specific details concerning settlement and delivery are quite distinct. For forward
contracts, settlement of the contract occurs at the end of the contract. Futures contracts are
marked-to-market daily, which means that daily changes are settled day by day until the end of
the contract. Furthermore, settlement for futures contracts can occur over a range of dates.
Forward contracts, on the other hand, only possess one settlement date.
Lastly, because futures contracts are quite frequently employed by speculators, who bet on the
direction in which an asset's price will move, they are usually closed out prior to maturity and
delivery usually never happens. On the other hand, forward contracts are mostly used by
hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash
settlement will usually take place.


The right of a stockholder to vote on matters of corporate policy and who will make up the
board of directors. Voting often involves decisions on issuing securities, initiating corporate
actions and making substantial changes in the corporation's operations.
Shareholders do not necessarily need to be physically present at the site of the company's
annual meeting in order to exercise their right to vote. It is common for shareholders to voice
their vote by proxy by mailing in their response. Unlike the single vote right that individuals
commonly possess in democratic governments, the number of votes that a shareholder has
corresponds to the numbers of shares that he owns. For example, a shareholder that owns 100
shares will have a 100 times more sway than a shareholder that owns a single share.
Futures and forward contracts are linear (zero sum game). Options are not.

Depository share
A U.S. dollar-denominated equity share of a foreign-based company available for purchase on
an American stock exchange. American Depositary Shares (ADSs) are issued by depository banks
in the U.S. under agreement with the issuing foreign company; the entire issuance is called an
American Depositary Receipt (ADR) and the individual shares are referred to as ADSs.

Depending on the level of compliance with U.S. securities regulations the foreign company
wishes to follow, the company may either list its shares over-the-counter (OTC) with low
reporting requirements or on a major exchange like the NYSE or Nasdaq. Listings on the latter
exchanges generally require the same level of reporting as domestic companies, and also
require adherence to GAAP accounting rules.


Firstly, do not confuse different classes of common stock with preferred stock. Preferred shares
are an entirely different type of security, affording their owners priority dividend payments and
a higher position on the priority ladder in the event of a company's liquidation or bankruptcy.
Common stock represents the lower-ranked (and much more prevalent) form of equity
financing. However, a company can choose to issue different classes of common stock to certain
investors, board members or company founders.

Generally, companies that choose to have multiple classes of common stock issue two classes,
usually denoted as Class A and Class B shares. Common practice is to assign more voting rights
to one class of stock than the other. For example, a private company that decides to go public
will usually issue a large number of common shares, but the occasional company will also
provide its founders, executives or other large stakeholders with a different class of common
stock that carries multiple votes for each single share of stock. Commonly, the "super voting"
multiple is about 10 votes per higher class share, although occasionally companies choose to
make them much higher. Usually, Class A shares are superior to Class B shares, but there is no
standard nomenclature for multiple share classes - sometimes Class B shares have more votes
than their Class A counterparts. Because of this, investors should always research the details of
a company's share classes if they are considering investing in a firm with more than one class.
Usually, the purpose of the super voting shares is to give key company insiders greater control
over the company's voting rights, and thus its board and corporate actions. The existence of
super voting shares can also be an effective defense against hostile takeovers, since key insiders
can maintain majority voting control of their company without actually owning more than half
of the outstanding shares.

Voting issues aside, different share classes typically have the same rights to profits and company
ownership. Thus, even though retail investors may be limited to purchasing only inferior classes
of common stock for a given company, they still enjoy a proportionally equal claim to the
company's profits. In these cases, investors see their fair share of a company's returns on equity,
although they do not enjoy the voting power their shares would normally provide in the
absence of dual classes. Provided the large stakeholders who own the disproportionate voting
shares are successful in running the company, this should be of little concern to investors -
especially the typical retail investor who has a very tiny stake in the company anyway. Normally,
the existence of dual class shares would only be a problem if an investor believed the
disproportionate voting rights were allowing inferior management to remain in place in spite of
the best interests of shareholders.

'Bid-Ask Spread'
The amount by which the ask price exceeds the bid. This is essentially the difference in price
between the highest price that a buyer is willing to pay for an asset and the lowest price for
which a seller is willing to sell it.
For example, if the bid price is $20 and the ask price is $21 then the "bid-ask spread" is $1.

The size of the spread from one asset to another will differ mainly because of the difference in
liquidity of each asset. For example, currency is considered the most liquid asset in the world
and the bid-ask spread in the currency market is one of the smallest (one-hundredth of a
percent). On the other hand, less liquid assets such as a small-cap stock may have spreads that
are equivalent to a percent or two of the asset's value.
The Two Sides Of Dual-Class Shares
What Are Dual-Class Shares?
When the Internet company Google went public, a lot of investors were upset that it issued a
second class of shares to ensure that the firm's founders and top executives maintained control.
Each of the Class B shares reserved for Google insiders would carry 10 votes, while ordinary
Class A shares sold to the public would get just one vote. (To learn more, see When Insiders Buy,
Should Investors Join Them?)

Designed to give specific shareholders voting control, unequal voting shares are primarily
created to satisfy owners who don't want to give up control, but do want the public equity
market to provide financing. In most cases, these super-voting shares are not publicly traded
and company founders and their families are most commonly the controlling groups in dual-
class companies.
Who Lists Them?
The New York Stock Exchange allows U.S. companies to list dual-class voting shares. Once shares
are listed, however, companies cannot reduce the voting rights of the existing shares or issue a
new class of superior voting shares. (For more information, see The NYSE And Nasdaq: How
They Work.)

Many companies list dual-class shares. Ford's dual-class stock structure, for instance, allows the
Ford family to control 40% of shareholder voting power with only about 4% of the total equity in
the company. Berkshire Hathaway Inc., which has Warren Buffett as a majority shareholder,
offers a B share with 1/30th the interest of its A-class shares, but 1/200th of the voting power.
Echostar Communications demonstrates the extreme power that can be had through dual-class
shares: founder and CEO Charlie Ergen has about 5% of the company's stock, but his super-
voting class-A shares give him a whopping 90% of the vote.
Good or Bad?
It's easy to dislike companies with dual-class share structures, but the idea behind it has its
defenders. They say that the practice insulates managers from Wall Street's short-term mindset.
Founders often have a longer term vision than investors focused on the most recent quarterly
figures. Since stock that provides extra voting rights often cannot be traded, it ensures the
company will have a set of loyal investors during rough patches. In these cases, company
performance may benefit from the existence of dual-class shares.

With that said, there are plenty of reasons to dislike these shares. They can be seen as
downright unfair. They create an inferior class of shareholders and hand over power to a select
few, who are then allowed to pass the financial risk onto others. With few constraints placed
upon them, managers holding super-class stock can spin out of control. Families and senior
managers can entrench themselves into the operations of the company, regardless of their
abilities and performance. Finally, dual-class structures may allow management to make bad
decisions with few consequences.

Hollinger International presents a good example of the negative effects of dual-class shares.
Former CEO Conrad Black controlled all of the company's class-B shares, which gave him 30% of
the equity and 73% of the voting power. He ran the company as if he were the sole owner,
exacting huge management fees, consulting payments and personal dividends. Hollinger's board
of directors was filled with Black's friends who were unlikely to forcefully oppose his authority.
Holders of publicly traded shares of Hollinger had almost no power to make any decisions in
terms of executive compensation, mergers and acquisitions, board construction poison pills or
anything else for that matter. Hollinger's financial and share performance suffered under Black's
control. (To learn more, see Mergers And Acquisitions: Understanding Takeovers.)

Academic research offers strong evidence that dual-class share structures hinder corporate
performance. A Wharton School and Harvard Business School study shows that while large
ownership stakes in managers' hands tend to improve corporate performance, heavy voting
control by insiders weakens it. Shareholders with super-voting rights are reluctant to raise cash
by selling additional shares--that could dilute these shareholders' influence. The study also
shows that dual-class companies tend to be burdened with more debt than single-class
companies. Even worse, dual-class stocks tend to under-performs the stock market.

The Bottom Line
Not every dual-class company is destined to perform poorly--Berkshire Hathaway, for one, has
consistently delivered great fundamentals and shareholder value. Controlling shareholders
normally have an interest in maintaining a good reputation with investors. Insofar as family
members wield voting power, they have an emotional incentive to vote in a manner that
enhances performance. All the same, investors should keep in mind the effects of dual-class
ownership on company fundamentals.
Short Selling: What Is Short Selling?
First, let's describe what short selling means when you purchase shares of stock. In purchasing
stocks, you buy a piece of ownership in the company. The buying and selling of stocks can occur
with a stock broker or directly from the company. Brokers are most commonly used. They serve
as an intermediary between the investor and the seller and often charge a fee for their services.
{C}When using a broker, you will need to set up an account. The account that's set up is either a
cash account or a margin account. A cash account requires that you pay for your stock when you
make the purchase, but with a margin account the broker lends you a portion of the funds at
the time of purchase and the security acts as collateral.

When an investor goes long on an investment, it means that he or she has bought a stock
believing its price will rise in the future. Conversely, when an investor goes short, he or she is
anticipating a decrease in share price.
Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is
the sale of a security that isn't owned by the seller, but that is promised to be delivered. That
may sound confusing, but it's actually a simple concept. (To learn more, read Benefit From
Borrowed Securities.)

Still with us? Here's the skinny: when you short sell a stock, your broker will lend it to you. The
stock will come from the brokerage's own inventory, from another one of the firm's customers,
or from another brokerage firm. The shares are sold and the proceeds are credited to your
account. Sooner or later, you must "close" the short by buying back the same number of shares
(called covering) and returning them to your broker. If the price drops, you can buy back the
stock at the lower price and make a profit on the difference. If the price of the stock rises, you
have to buy it back at the higher price, and you lose money.

Most of the time, you can hold a short for as long as you want, although interest is charged on
margin accounts, so keeping a short sale open for a long time will cost more However, you can
be forced to cover if the lender wants the stock you borrowed back. Brokerages can't sell what
they don't have, so yours will either have to come up with new shares to borrow, or you'll have
to cover. This is known as being called away. It doesn't happen often, but is possible if many
investors are short selling a particular security.

Because you don't own the stock you're short selling (you borrowed and then sold it), you must
pay the lender of the stock any dividends or rights declared during the course of the loan. If the
stock splits during the course of your short, you'll owe twice the number of shares at half the
price. (To learn more about stock splits, read Understanding Stock Splits.)

Short selling
Short selling (or selling short) is a technique used by people who try to profit from the
falling price of a stock. Short selling is a very risky technique as it involves precise timing
and goes contrary to the overall direction of the market. Since the stock market has
historically tended to rise in value over time, short selling requires precise market timing,
which is a very difficult feat.
Heres how short selling works. Assume you want to sell short 100 shares of a company
because you believe sales are slowing and its earnings will drop. Your broker will borrow the
shares from someone who owns them with the promise that you will return them later. You
immediately sell the borrowed shares at the current market price. When the price of the
shares drops (you hope), you cover your short position by buying back the shares, and your
broker returns them to the lender. Your profit is the difference between the price at which you
sold the stock and your cost to buy it back, minus commissions and expenses for borrowing
the stock. But if youre wrong, and the price of the shares increase, your potential losses are
unlimited. The companys shares may go up and up, but at some point you have to replace
the 100 shares you sold. In that case, your losses can mount without limit until you cover
your short position.
Rebate
1. In a short-sale transaction, the portion of interest or dividends earned by the
owner (lender) of shares that are paid to the short seller (borrower) of the
shares.

2. In an options transaction, the amount paid to the holder of the option if the
option expires worthless.


Short Squeeze
A situation in which a heavily shorted stock or commodity moves sharply higher, forcing more
short sellers to close out their short positions and adding to the upward pressure on the stock. A
short squeeze implies that short sellers are being squeezed out of their short positions, usually
at a loss. A short squeeze is generally triggered by a positive development that suggests the
stock may be embarking on a turnaround. Although the turnaround in the stocks fortunes may
only prove to be temporary, few short sellers can afford to risk runaway losses on their short
positions and may prefer to close them out even if it means taking a substantial loss.

Margin Call
A broker's demand on an investor using margin to deposit additional money or securities so that
the margin account is brought up to the minimum maintenance margin. Margin calls occur
when your account value depresses to a value calculated by the broker's particular formula.

This is sometimes called a "fed call" or "maintenance call."

Black Swan event
An event or occurrence that deviates beyond what is normally expected of a situation and that
would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a
finance professor and former Wall Street trader.

Fire Sale

Selling goods or assets at heavily discounted prices. Fire sale originally referred to the discount
sale of goods that were damaged by fire; it may now refer to any sale where the seller is in
financial distress. In the context of the financial markets, fire sale refers to securities that are
trading well below their intrinsic value, such as during prolonged bear markets.

'SEC Form DEF 14A'
A filing with the Securities and Exchange Commission (SEC) that must be filed by or on behalf of
a registrant when a shareholder vote is required. SEC Form DEF 14A is most commonly used in
conjunction with an annual meeting proxy. The form should provide security holders with
sufficient information to allow them to make an informed vote at an upcoming security holders'
meeting or to authorize a proxy to vote on their behalf. It includes information about the date,
time and place of the meeting of security holders; revocability of proxy; dissenter's right of
appraisal; persons making the solicitation; direct or indirect interest of certain persons in
matters to be acted upon; modification or exchange of securities; financial statements; voting
procedures; and other details.
Form DEF 14A, which is also known as "definitive proxy statement", is required under Section
14(a) of the Securities Exchange Act of 1934. This form is filed with the SEC when a definitive
proxy statement is given to shareholders and helps the SEC ensure that shareholders' rights are
upheld.

There are both differences and similarities between capital and money markets. From the issuer
or seller's standpoint, both markets provide a necessary business function: maintaining
adequate levels of funding. The goal for which sellers access each market varies depending on
their liquidity needs and time horizon. Similarly, investors or buyers have unique reasons for
going to each market: Capital markets offer higher-risk investments, while money markets offer
safer assets; money market returns are often low but steady, while capital markets offer higher
returns. The magnitude of capital market returns is often a direct correlation to the level of risk,
however that is not always the case.

Although markets are deemed efficient in the long run, short-term inefficiencies allow investors
to capitalize on anomalies and reap higher rewards that may be out of proportion to the level of
risk. Those anomalies are exactly what investors in capital markets try to uncover. Although
money markets are considered safe, they have occasionally experienced negative returns.
Inadvertent risk, although unusual, highlights the risks inherent in investing - whether long or
short term, money markets or capital markets.

Cyclical Industry

A type of an industry that is sensitive to the business cycle, such that revenues are generally
higher in periods of economic prosperity and expansion, and lower in periods of economic
downturn and contraction.

Companies in cyclical industries can deal with this type of volatility by implementing cuts to
compensations and layoffs during bad times, and paying bonuses and hiring en masse in good
times. Cyclical industries include those that produce durable goods such as raw materials and
heavy equipment. A type of an industry that is sensitive to the business cycle, such that
revenues are generally higher in periods of economic prosperity and expansion, and lower in
periods of economic downturn and contraction.

Companies in cyclical industries can deal with this type of volatility by implementing cuts to
compensations and layoffs during bad times, and paying bonuses and hiring en masse in good
times. Cyclical industries include those that produce durable goods such as raw materials and
heavy equipment.
For example, the airline industry is a fairly cyclical industry; in good economic times, people
have more disposable income and, therefore, they are more willing to take vacations and make
use of air travel.

Conversely, during bad economic times, people are much more cautious about spending. As a
result, they tend to take more conservative vacations closer to home (if they go at all) and avoid
expensive air travel.

Mezzanine Financing
A hybrid of debt and equity financing that is typically used to finance the expansion of existing
companies. Mezzanine financing is basically debt capital that gives thSince mezzanine financing
is usually provided to the borrower very quickly with little due diligence on the part of the
lender and little or no collateral on the part of the borrower, this type of financing is
aggressively priced with the lender seeking a return in the 20-30% range.e lender the rights to
convert to an ownership or equity interest in the company if the loan is not paid back in time
and in full. It is generally subordinated to debt provided by senior lenders such as banks and
venture capital companies.
Mezzanine financing is advantageous because it is treated like equity on a company's balance
sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing,
a company usually must demonstrate a track record in the industry with an established
reputation and product, a history of profitability and a viable expansion plan for the business
(e.g. expansions, acquisitions, IPO).

Standstill Agreement
1. A contract that stalls or stops the process of a hostile takeover. The target firm either
offers to repurchase the shares held by the hostile bidder, usually at a large premium, or
asks the bidder to limit its holdings. This act will stop the current attack and give the
company time to take preventative measures against future takeovers.

2. An agreement between a lender and borrower in which the lender stops demanding
the repayment of the loan. A new deal is negotiated, usually altering the loan's original
repayment schedule. This is used as an alternative to bankruptcy or foreclosure when
the borrower can't repay the loan.
Private Placement
The sale of securities to a relatively small number of select investors as a way of raising capital.
Investors involved in private placements are usually large banks, mutual funds, insurance
companies and pension funds. Private placement is the opposite of a public issue, in which
securities are made available for sale on the open market.
Management Buyout

A transaction where a companys management team purchases the assets and operations of the
business they manage. A management buyout (MBO) is appealing to professional managers
because of the greater potential rewards from being owners of the business rather than
employees. MBOs are favored exit strategies for large corporations who wish to pursue the sale
of divisions that are not part of their core business, or by private businesses where the owners
wish to retire. The financing required for an MBO is often quite substantial, and is usually a
combination of debt and equity that is derived from the buyers, financiers and sometimes the
seller.
An MBO is different from a management buy-in (MBI), in which an external management team
acquires a company and replaces the existing management team. It also differs from a leveraged
management buyout (LMBO), where the buyers use the company assets as collateral to obtain
debt financing.

An MBOs advantage over an MBI is that as the existing managers are acquiring the business,
they have a much better understanding of it and there is no learning curve involved, which
would be the case if it were being run by a new set of managers. The advantage of an MBO over
an LMBO is that the companys debt load may be lower, giving it more financial flexibility.

However, there are several drawbacks to the MBO structure as well. While the management
team can reap the rewards of ownership, they have to make the transition from being
employees to owners, which requires a change in mindset from managerial to entrepreneurial.
Not all managers may be successful in making this transition.

Also, the seller may not realize the best price for the asset sale in an MBO. If the existing
management team is a serious bidder for the assets or operations being divested, the managers
have a potential conflict of interest. That is, they could downplay or deliberately sabotage the
future prospects of the assets that are for sale to buy them at a relatively low price.

MBOs are viewed as good investment opportunities by hedge funds and large financiers, who
usually encourage the company to go private so that it can streamline operations and improve
profitability away from the public eye, and then take it public at a much higher valuation down
the road. While private equity funds may also participate in MBOs, their preference may be for
MBIs, where the companies are run by managers they know rather than the incumbent
management team.

Free Cash Flows to Equity



The formula for free cash flow to equity is net income minus capital expenditures minus
change in working capital plus net borrowing.
The free cash flow to equity formula is used to calculate the equity available to
shareholders after accounting for the expenses to continue operations and future capital
needs for growth.

sNet Income is found on a firm's income statement and is the firm's earnings after
expenses, including interest expenses and taxes. Net income may also be found on the
cash flow statement which may save time considering other factors of the free cash flow
to equity formula are on there as well. Net income may be referred to as "the bottom
line".
A firm's prior capital expenditures can be found on its cash flow statement and
represents capital used for long term or fixed assets.
A firm's working capital is current assets minus current liabilities. The term "current"
implies that the assets and liabilities are liquid, generally representing less than one
year, and used for short term operations. Current assets and current liabilities can be
found on a firm's balance sheet.s
Net borrowing is the difference between the amount a company borrows and what debt
it repays. It is important to not include interest as this is already figured into net income
(interest expense). Net borrowing can be found by comparing changes on a company's
balance sheet.

Use of the FCFE Formula
The free cash flow to equity formula may be used by investors and analysts in replace of
dividends when analyzing a company. One of the most notable examples of this is in the
free cash flow to equity model for valuing a stock. The free cash flow to equity model
differs from the dividend discount method only in that it uses free cash flow to equity
instead of dividends.
To understand the use the free cash flow to equity formula, one must understand the
components of it and how it differs from dividends. A company's net income is also
referred to its earnings. A company pays some of the earnings out to investors in the
form of dividends and the amount retained is used for future growth. The formula for
cash flow to equity starts with the company's earnings. Capital expenditures is
substracted to account for the amount needed for assets used for growth. The next
variable, change in working capital, is subtracted to account for an increase in capital
needed for short term operations. Lastly, net borrowing is added, or subtracted if
negative, to account for any capital received from taking new debt, or lost due to
repayment of debt. These factors all resolve to the amount available to equity, or
shareholders.
Although the free cash flow to equity may calculate the amount available to
shareholders, it does not necessarily equate to the amount that is paid out to
shareholders



-




FCFF = CFO + After tax interest - CFI
FCFE = Net Income (Capex Depreciation) NWC + Net Borrowings
CFO = NI + Depreciation + Deferred Taxes NWC
CFI = CAPEX

Examples of Investing activities are
Purchase or Sale of an asset (assets can be land, building, equipment, marketable
securities, etc.)
Loans made to suppliers or received from customers
Payments related to mergers and acquisition.
CFF Cash flow from financing
CFF = Net Borrowings Dividends

Financing activities include the inflow of cash from investors such as banks and shareholders,
as well as the outflow of cash to shareholders as dividends as the company generates income.
Other activities which impact the long-term liabilities and equity of the company are also
listed in the financing activities section of the cash flow statement.
Under IAS 7,
Payments of dividends
Payments for repurchase of company shares
For non-profit organizations, receipts of donor-restricted cash that is limited to long-term
purposes
Items under the financing activities section include:
Dividends paid
Sale or repurchase of the company's stock
Net borrowings
Payment of dividend tax
Repayment of debt principal, including capital leases

1. Tax Benefits Related to Employee Stock Options (See #1 on Amgen CFO statement)
Amgen\'s CFO was boosted by almost 9 million because a company gets a tax deduction when
employees exercise non-qualified stock options. As such, almost 8% of Amgen\'s CFO is not due to
operations and is not necessarily recurring, so the amount of the 8% should be removed from CFO.
Although Amgen\'s cash flow statement is exceptionally legible, some companies bury this tax benefit
in a footnote.
To review the next two adjustments that must be made to reported CFO, we will consider Verizon\'s
statement of cash flows below.
2. Unusual Changes to Working Capital Accounts (receivables, inventories and payables) (Refer to #2
on Verizon\'s CFO statement.)
Although Verizon\'s statement has many lines, notice that reported CFO is derived from net income
with the same two sets of add backs we explained above: non-cash expenses are added back to net
income and changes to operating accounts are added to or subtracted from it:



Notice that a change in accounts payable contributed more than $2.6 billion to reported CFO. In other
words, Verizon created more than $2.6 billion in additional operating cash in 2003 by holding onto
vendor bills rather than paying them. It is not unusual for payables to increase as revenue increases,
but if payables increase at a faster rate than expenses, then the company effectively creates cash flow
by "stretching out" payables to vendors. If these cash inflows are abnormally high, removing them
from CFO is recommended because they are probably temporary. Specifically, the company could pay
the vendor bills in January, immediately after the end of the fiscal year. If it does this, it artificially
boosts the current-period CFO by deferring ordinary cash outflows to a future period.
Divident Payout = Total Div / Net Income note the denominator is net income
Operating margin = EBIT / sales


-



1


1


Coattail Investing

An investment strategy in which investors mimic the trades of well-known and historically
successful investors.
Poison put
A bond that allows bondholders to redeem before maturity at a high price should certain, named
events take place. These events commonly include restructuring, a leveraged buyout, an attempted
hostile takeover, or paying dividends in excess of a certain amount or percentage. Poison-put bonds
can act as an anti-takeover measure; they help management discourage takeovers by raising their
expense. On the other hand, when the company is going through a difficult time, poison-put bonds
can limit management's restructuring options for the same reason.
1. In bond trading, a bond indenture that gives the bondholder the right to demand redemption
before maturity at its high par value in case certain event happen. Such pre-designated events
include restructuring of the bond issuing company, excessive dividend distribution to its
stockholders, a leveraged buyout, or a hostile takeover attempt. A poison put helps the
management of the target company to deter the takeover attempt by making it very costly for the
bidder. In times of low liquidity, however, this put works against the management as the bond
holders can pressure the company into a reorganization or to increase its borrowing costs.
2. In stocks trading, the rights assigned to common stockholders that sharply escalates the price of
their stockholding, or allows them to purchase the company's shares at a very attractive fixed price,
in case of a hostile takeover attempt. also called event risk covenant

Risk based haircut
A reduction in the recognized value of an asset in order to produce an estimate for the level of
margin or financial leverage that is acceptable to use when purchasing or continuing to own the
asset. An analyst undertaking a risk-based haircut of an asset attempts to determine the
chances of the asset's value falling below its current level, so that a sufficient buffer can be
established to protect against a margin call.
A risk-based haircut is important to do in order to provide a margin of safety to protect against
the possibility of a margin call or similar type of over-leveraged position in a security. By
artificially reducing the recognized value of an asset before undertaking a leveraged position in
it, the actual market value of the asset must fall by an increased amount than if no haircut was
applied in order for a margin call to take place. This decreases the chances of an ill-time margin
call or forced sale of the security for a low price taking place in the investors account.

Debt-for-equity swap
In a debt-for-equity swap, a company's creditors generally agree to cancel some or all of the
debt in exchange for equity in the company.
Debt for equity deals often occur when large companies run into serious financial trouble,
and often result in these companies being taken over by their principal creditors. This is
because both the debt and the remaining assets in these companies are so large that there is no
advantage for the creditors to drive the company into bankruptcy. Instead the creditors prefer
to take control of the business as a going concern. As a consequence, the original
shareholders' stake in the company is generally significantly diluted in these deals and may
be entirely eliminated, as is typical in a Chapter 11 bankruptcy.
Sub-prime mortgage crisis[edit]
Debt-for-equity swaps are one way of dealing with sub-prime mortgages. A householder
unable to service his debt on a $180k mortgage for example, may by agreement with his bank
have the value of the mortgage reduced (say to $135k or 75% of the house's current value), in
return for which the bank will receive 50% of the amount by which any resale value, when
the house is resold, exceeds $135k.
Bondholder haircuts[edit]
A debt-for-equity swap may also be called a "bondholder haircut." Bondholder haircuts at
large banks were advocated as a potential solution for the subprime mortgage crisis by
prominent economists:
Economist Joseph Stiglitz testified that bank bailouts "...are really bailouts not of the
enterprises but of the shareholders and especially bondholders. There is no reason that
American taxpayers should be doing this." He wrote that reducing bank debt levels by
converting debt into equity will increase confidence in the financial system. He believes that
addressing bank solvency in this way would help address credit market liquidity issues.
[2]

Economist Jeffrey Sachs has also argued for bondholder haircuts: "The cheaper and more
equitable way would be to make shareholders and bank bondholders take the hit rather than
the taxpayer. The Fed and other bank regulators would insist that bad loans be written down
on the books. Bondholders would take haircuts, but these losses are already priced into
deeply discounted bond prices."
[3]

If the key issue is bank solvency, converting debt to equity via bondholder haircuts presents
an elegant solution to the problem. Not only is debt reduced along with interest payments, but
equity is simultaneously increased. Investors can then have more confidence that the bank
(and financial system more broadly) is solvent, helping unfreeze credit markets. Taxpayers do
not have to contribute dollars and the government may be able to just provide guarantees in
the short-term to further support confidence in the recapitalized institution.
For example, one of the largest U.S. banks owed its bondholders $267 billion per its 2008
annual report.
[4]
A 20% haircut would reduce this debt by about $54 billion, creating an equal
amount of equity in the process, thereby recapitalizing the bank significantly.

Second Lien Debt
When lenders issue loans to borrowers, they commonly require that collateral be made against
the principal of the loan to ensure that the principal can be repaid in the future.

In the case of a real estate mortgage, the lender effectively places a lien on the asset so that if it
is sold, the lender will be first in line to receive funds. If a second mortgage is taken out on the
same property, the second loan will be considered second lien debt to the first mortgage, and
will be subordinate to the first in terms of return of principal. For this reason, second lien debt is
usually considered riskier than higher lien debt and often comes with a higher interest rate as a
result.
'Revolving Credit'

A line of credit where the customer pays a commitment fee and is then allowed to use the funds
when they are needed. It is usually used for operating purposes, fluctuating each month
depending on the customer's current cash flow needs.

Roll up
Write down all of you debt balances and the minimum monthly payment for each. Then,
divide the balances by the minimum monthly payment. This gives you a number called the
"divisor" which is assigned to each debt.
Next, order your debts starting with the one with the largest divisor, working your way down
the list. If two debts have equal divisors, list the one with the lowest interest rate first.
Now, for every debt except the bottom debt, you only make the absolute minimum payment
for each. For the bottom debt however, you pay the minimum plus whatever extra amount
that you have. You do this each month until that bottom debt is fully paid off.
Next, you roll up the amount that you had been paying on the bottom debt, and start
applying it to the next debt above it on the list. You keep doing this until all the debts are
gone.

DIP financing
Financing arranged by a company while under the Chapter 11 bankruptcy process. DIP financing
is unique from other financing methods in that it usually has priority over existing debt, equity
and other claims.
Chapter 11 gives the debtor a fresh start, which is, however, subject to the debtor's fulfillment
of its obligations under its plan of reorganization.

An individual or corporation that has filed for Chapter 11 bankruptcy protection and remains in
control of property that a creditor has a lien against, or retains the power to operate a business.
A debtor who files a Chapter 11 bankruptcy case becomes the debtor in possession (DIP). The
DIP continues to run the business and has the powers and obligation of a trustee to operate in
the best interest of any creditors. A DIP can operate in the ordinary course of business, but is
required to seek court approval for any actions that fall outside of the scope of regular business
activities. The DIP must also keep precise financial records and file appropriate tax returns.
After filing for Chapter 11 bankruptcy, new bank accounts are opened that name the debtor in
possession on the account. A debtor in possession can be terminated and the court will appoint
a trustee in the event that assets are improperly managed or the debtor in possession is not
following court orders. The United States Trustee's office maintains guidelines that specify the
duties of a debtor in possession.

Credit event
Any sudden and tangible (negative) change in a borrower's credit standing or decline in credit
rating. A credit event brings into question the borrower's ability to repay its debt. It is the
defining trigger in a credit derivative contract, or credit default swap. If the borrower
experiences a credit event, then the buyer of the contract must pay the seller an agreed-upon
sum to cover the loss.
Credit events include bankruptcies or violating a bond indenture or other loan agreement. Any
decline in the borrower's credit rating can trigger the swap. Credit events always refer to the
condition of the borrower pertaining to the underlying asset and not to either the lender or the
purchaser of the swap.
Credit Default Swap - CDS
A swap designed to transfer the credit exposure of fixed income products between parties. A
credit default swap is also referred to as a credit derivative contract, where the purchaser of the
swap makes payments up until the maturity date of a contract. Payments are made to the seller
of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the
loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating
on the possibility that the third party will indeed default.
The buyer of a credit default swap receives credit protection, whereas the seller of the swap
guarantees the credit worthiness of the debt security. In doing so, the risk of default is
transferred from the holder of the fixed income security to the seller of the swap. For example,
the buyer of a credit default swap will be entitled to the par value of the contract by the seller of
the swap, should the third party default on payments. By purchasing a swap, the buyer is
transferring the risk that a debt security will default.

Debentures
A type of debt instrument that is not secured by physical assets or collateral. Debentures are
backed only by the general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond in order to secure capital. Like other types of
bonds, debentures are documented in an indenture.
Debentures have no collateral. Bond buyers generally purchase debentures based on the belief
that the bond issuer is unlikely to default on the repayment. An example of a government
debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-
bonds and T-bills are generally considered risk free because governments, at worst, can print off
more money or raise taxes to pay these type of debts.
Convertible Debentures

A type of loan issued by a company that can be converted into stock by the holder and, under
certain circumstances, the issuer of the bond. By adding the convertibility option the issuer pays
a lower interest rate on the loan compared to if there was no option to convert. These
instruments are used by companies to obtain the capital they need to grow or maintain the
business.

Convertible debentures are different from convertible bonds because debentures are
unsecured; in the event of bankruptcy the debentures would be paid after other fixed income
holders. The convertible feature is factored into the calculation of the diluted per-share metrics
as if the debentures had been converted. Therefore, a higher share count reduces metrics such
as earnings per share, which is referred to as dilution.

Warrant


A derivative security that gives the holder the right to purchase securities (usually equity) from
the issuer at a specific price within a certain time frame. Warrants are often included in a new
debt issue as a "sweetener" to entice investors.
The main difference between warrants and call options is that warrants are issued and
guaranteed by the company, whereas options are exchange instruments and are not issued by
the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a
typical option is measured in months.


Cash from Financing Activities
Cash received from Issuing Equity Dividends Paid out Interest payments


A positive number for cash flow from financing activities means more money is flowing into the
company than flowing out, which increases the companys assets. Negative numbers can mean
the company is servicing debt, but can also mean the company is retiring debt or making dividend
payments and stock repurchases, which investors might be glad to see. Investors can also get
information about cash flow from financing activities from the balance sheets equity and long-
term debt sections and possibly the footnotes. Cash flow from financing activities is one of the
three main sections of a companys cash flow statement, the other two being cash flow from
operations and cash flow from investing. This section of the cash flow statement measures the
movement of cash between a firm and its owners and creditors.

Financing activities that generate positive cash flow include receiving cash from issuing stock
and receiving cash from issuing bonds. Financing activities that generate negative cash flow
include spending cash to repurchase previously issued stock, to pay down debt, to pay interest on
debt and to pay dividends to shareholders.

Total Capital -
Total capital = Shareholders equity +Total Debt
The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is
financing its operations, along with some insight into its financial strength. The higher the debt-
to-capital ratio, the more debt the company has compared to its equity. This tells investors
whether a company is more prone to using debt financing or equity financing. A company with
high debt-to-capital ratios, compared to a general or industry average, may show weak financial
strength because the cost of these debts may weigh on the company and increase its default
risk.
Gross Profit = Sales COGS
EBIT = Gross Profit SG&A - Depreciation



Percent of sales method
Inventory = % of sales
COGS = % of sales
SG&A = % of sales
CAPEX = % of sales
Depreciation = % of CAPEX
Deferred Taxes = % of CAPEX
NI = % of sales
Dividend = % of NI
Tax = marginal tax rate
Addition to RE = % of NI

Incremental investment rate investment in fixed asset (fixed PPE) required per dollar increment in
sales


1995 1996 1997 1998 1999

Incremental
Fixed Capital
Investments
-95.3 -53.1 -235.3 -128.8 -205.5

Sales 3,676.30 5,035.20 6,293.70 7,467.90 8,645.60

Incremental
Sales
975.1 1,358.90 1,258.50 1,174.20 1,177.60

Incremental
Fixed Capital
Investment
Rate
9.77% 3.91% 18.70% 10.97% 17.45%



Net New Financing = Projected Assets - Projected Liabilities and Equity