Return on Investment measurements - ANS-ROE, ROIC, ROA, Dividend Yield
LLC - ANS-A Limited Liability Company (LLC) is a relatively new business
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offered via state law, that offers owners ("members" in LLC language) pass-through
taxation of profits or losses, personal liability protection, and, unlike S corporations, no
limits on the type or number of investors. Unlike an S corporation, an investor in an LLC
does not need to be a "natural" person nor does that person need to be a US citizen,
again in contrast to S corporations. C corporations, the traditional corporate structure,
have no limits on the type or number of investors and the C corporation offers owners
personal liability protection, however, the C corporation does not offer pass-through
taxation -- in other words profits and losses are reported and taxed at the corporate
level not "passed-through" to the shareholders.
Rule 13e-3 - ANS-must be followed if an issuer extends a tender offer to go private. The
issuer should file Schedule 13E-3, which must describe the purpose of the transaction
as well as any alternatives the company considered and rejected. The issuer must give
its opinion about whether the decision to go private is fair to shareholders, and it must
state why any directors were against (or abstained from) the decision to go private.
Also, File Schedule 13E-3 and keep the tender offer open at least 30 business days,
rather than the 20 business days required with a standard tender offer
SEC Disclosure Standard - ANS-The disclosure standard requires that all relevant
information must be included on the offering statement. In addition, information
contained in the offering must be true and necessary for investors to make an informed
decision about the offering.
nominal yield - ANS-AKA...Coupon Rate never changes through the life of the bond.
Current Yield, Price, and Yield to Maturity change with market
preferred stock - ANS-represents ownership (equity) in a business, unlike common
stock preferred shares have some characteristics of debt securities. Typically, these
include a fixed dividend and no voting rights. Like common dividends, preferred
dividends come out of net income and thus are not a deductible business expense.
Also, like common dividends if a preferred dividend payment is missed, a company
usually doesn't go under. With debt, missing interest payments can mean liquidation for
an issuer.
growth stocks - ANS-As a result of their popularity, growth stocks have, on average,
higher price-to-earnings, price-to-book, and price-to-sales ratios, as well lower than
average dividend yields. Value stocks, by definition, have lower PE ratios, lower priceto-book and price to sales ratios and higher dividend yields. Growth stocks, with their
higher share prices and valuation measures, have farther to fall in bad times, therefore
they are more volatile than their already low-priced value investing cousins. Growth
stock betas are therefore above 1 (the market) while value stock betas are below 1.
Rising Interest Rates - ANS-Rising interest rates make real estate lending more
expensive, thereby reducing demand for buildings, builders and the appliances that go
into buildings. Also, when interest rates increase, REITs might be less attractive to
investors because bonds might pay more. Insurance companies profit on the difference
between the premiums they receive and claims they pay. When rates rise, insurance
companies earn more on the premiums they have invested.
Callable Bond Option - ANS-A callable bond is a bond that the issuer is allowed to
buyback at a certain price before maturity. The call price is usually slightly above the par
value of the bond ($1050 versus $1000). Callable bonds are usually called when
interest rates decline because the issuer can refund the higher coupon rate bonds and
replace the debt with lower coupon rate bonds. The callable feature allows the issuer to
change the terms of the debt if the bonds are refunded, including getting rid of any
unfavorable indenture provisions. Callable bonds are typically issued at higher coupon
rates than comparable non-callable bonds which is an advantage for bondholders, but
they also come with reinvestment risk which is a disadvantage for bondholders.
Working Capital Ratio - ANS-AKA...Current Ratio: Current Assets / Current Liabilities
The working capital ratio measures a company's ability to meet its short-term
obligations.
tender offer - ANS-an acquirer makes a public offer to shareholders of a publicly traded
target corporation to tender their stock at a specified time and price, subject to a
minimum amount of shares being sold. The SEC regulates tender offers and anti-fraud
provisions are covered under SEC guidelines. In situations where the ownership is 5%
or less, generally the SEC rules do not apply.
Asset-backed securities - ANS-generally pools of various assets (e.g., credit card
receivables, auto loans, etc.) that are packaged and sold to enable a bank/finance
company to raise cash. Due to the way these assets are structured / packaged, they are
typically less liquid than other marketable securities.
Fiscal policy - ANS-is the use of the federal budget and taxation to influence the
economy. To stimulate the economy, the government would lower taxes or increase the
size of the federal budget.
Put options - ANS-are the only kind of investment from the above list that actually go up
in value when the price of the underlying stock goes down. Since Joe believes the stock
value is likely to go down soon, he should invest in put options.
P/E Ratio - ANS-The P/E ratio is a measure of the equity value of the company, divided
by its profits. By definition, the P/E ratio is a measure that reflects the equity portion of a
company, it does not include any measure of non-stock capital, such as debt financing.
Therefore, the P/E ratio would not be a useful way to compare businesses with different
capital structures. EV/EBITDA, which includes all forms of financing and does not
require profitability, would be more appropriate for such enterprise level comparisons.
The inverse of the P/E ratio is earnings yield, which helps investors compare the returns
of stocks to bonds.
Earnings Yield - ANS-The inverse of P/E ratio, which helps investors compare the
returns of stocks to bonds
Futures contracts - ANS-trade on centralized future exchanges. The contract size,
grade of commodity, and delivery date are all standardized in a futures contract, they
are not customizable, so Statement III is not true. Futures require daily settling up of any
gains or losses on the contract, so Statement I is also not true.
forward contracts - ANS-in contrast to futures contracts, forward contracts do not trade
on exchanges, are fully customizable in terms of delivery date and contract size, and do
not have daily settlement requirements (money only changes hands on delivery date).
bond refunding - ANS-is the replacement of existing bonds with new "refunding" bonds.
The issuer of refunding bonds often seeks to lower its interest payments by paying off
its previously issued (refunded) bonds with newly issued bonds that pay interest at a
lower rate. Another reason to refund existing bonds may be to release the issuer from
legal covenants or restrictions in the original indenture.
REIT - ANS-1) Invest at least 75% of its assets into real estate or cash
2) Distribute at least 90% of its taxable income to shareholders annually in the form of
dividends
3) Be a corporation, trust, or association that would be taxable as a domestic
corporation except for its status as a REIT.
4) Be managed by a board of directors and have 'unit' shares that are fully transferable
5) Have a minimum of 100 shareholders after its first year of operation, and no more
than 50% of its shares may be held by five or fewer individuals during the last half of
any taxable year
6) Derive at least 75% of its gross income from its real estate sources
7) Derive at least 95% of its gross income from those real estate sources mentioned
above and dividends and interest from other sources
8) Have no more than 25% of its assets in securities of taxable REIT subsidiaries
ADR vs GDR - ANS-ADRs (American Depository Receipts) represent ownership in
shares of foreign stock that trade in U.S. markets. ADRs allow investors to purchase
foreign investments without having to transact business in another country. Investors
benefit from the simplicity of purchasing ADRs because ADRs trade in the U.S. market
in U.S. dollars, with all dividends being converted to U.S. dollars. GDRs (Global
Depository Receipts) are similar to ADRs, but trade on foreign exchanges outside of the
issuer's home country.
From FINRA Rule 6540 - ANS-Requirements Applicable to Market Makers: "A member
firm that has qualified as a market maker in a particular OTCBB-eligible security may
enter into the Service a priced bid and/or offer, an unpriced indication of interest
(including 'bid wanted' and 'offer wanted' indications) or a bid or offer accompanied by a
modifier to reflect unsolicited customer interest."
SLGS - ANS--State and Local Government Series
-Offered solely to municipalities to protect their investments. As such, they have a very
low credit risk. While their yield is almost always below that of their corresponding
Treasury security, they are not marketable because the municipality may not offer them
to the general market, ever.
Lowering Interest Rates - Fed - ANSADR Dividend - ANS-ADRs can pay dividends, but the dividends must be converted into
US dollars. If the US dollar strengthens against the euro, you can buy more euro per
dollar. Another way of stating this is it takes more euro to purchase each dollar. So
when the dividend payment is converted from euro to dollar after the strengthening of
the dollar, the American investor gets fewer dollars, so the dividend is worth less to the
American.
Why does a company REPURCHASE SHARES - ANSUnsponsored ADR - ANS-Investors in unsponsored ADRs are only entitled to dividends.
They are not entitled to voting rights, preemptive rights, or the right to buy stock at a set
price in the future. Unsponsored ADRs are often issued by more than one depository
bank with each depository bank responsible for only the shares that it issues. The
depository bank has no formal agreement with the foreign company that has issued the
underlying foreign stock. Unsponsored shares trade on the OTC market.
Eurobonds - ANSCurrent Ratio - ANSSponsored ADR - ANS--Sponsored ADRs are issued by one depository bank and
appointed by the foreign company.
-Most sponsored ADRs offer voting rights.
Preemptive Rights - ANSPIPE - ANS--Private Investment in Public Equity
-When public companies raise funds by selling shares in a private offering.
-PIPE transaction is a private offering, the company does not need to file a registration
statement before the deal closes.
-Most companies typically register the offering after the deal closes, however, so that
investors will not be subject to resale restrictions. After the PIPE transaction, a company
typically files an 8-K form to alert their shareholders, the public, and the SEC of the
transaction. Because a PIPE transaction can have a dilutive effect on the earnings per
share, NASDAQ requires issuers to file a notification form within 10 days of the closing
if the transaction resulted in an increase of 5% or more of the shares outstanding. There
is no limit on how many shares can be sold in a PIPE transaction. NASDAQ and the
exchanges require that if a company sells more than 20% of its outstanding common
stock in a PIPE transaction, the shares must be sold at or above the fair market price
unless the company obtains shareholder approval. If a company is not selling more than
20% of its outstanding common stock, the shares can be sold at either above or below
the market price.
-PIPE transaction is a private investment in a public equity security. The PIPE can be
registered or unregistered, and if unregistered the shares are not freely tradable
Impact of LIFO on Inventory - ANSPV - ANS--Present Value
PV = FV/(1 + discount rate)*
FV: Future Value
Bond Points - ANS--How Corporate bonds are quoted
-Bond Points are a percentage of Par Value
-Ex: $1000 corporate bond quoted at 96 is 96% or $960 par value.
Arbitrage - ANS-In arbitrage, an investor uses the price differential of two transactions to
make a profit. The investor either buys and sells similar securities simultaneously or
buys a security on one market while simultaneously selling that same security on
another market.
Interest Rate Risk - ANS-Interest rate risk refers to the risk of fluctuation in the market
value of fixed income investment products, due to interest rate movements. Typically,
interest rate risk is higher for fixed income investment products with longer maturities
and higher durations.
Monetary Policy - ANS-Monetary policy is concerned with the supply of ________ and
the cost of __________. Monetary policy is directed by the _________ which targets the
_________ rate, the interest rate that large banks charge each other for overnight
borrowing.
-Money, credit, Federal Reserve, federal funds
ADS - ANS-American Depository Share
When a U.S. investor wants to invest in a foreign-owned company, he or she can buy
ADSs through a U.S. bank which then issues the investor an ADR certificate. ADS
stands for American Depository Share and ADR stands for American Depository
Receipt. The shares are what the investor buys and the share type and amount is
documented on the ADR certificate, which the bank provides to the investor. ARS
stands for auction-rate securities which have nothing to do with foreign-owned
companies.
Forward P/E - ANS-The forward P/E multiple is calculated by taking the current market
price and dividing by the projected earnings for a 12 month period. In this case, we
would take the 2009 market price of $87 and multiply by the number of outstanding
shares in 2009, which is 5.6 million. This gives a total current market price of $487.2
million. Then we divide by the projected earnings for 2010 which is $50.9 million. This
results in a forward P/E of 9.57 (87 * 5.6 / 50.9 = 9.57). The current P/E for 2009 is
11.28. When the forward P/E is lower than the current P/E it means that earnings are
expected to grow.
Form 3 - ANS-Form 3 must be filed with the SEC no later than the effective date of the
registration statement for an IPO. Form 3 contains information about affiliates' (officers,
directors, and those who hold 10% or greater of the company's stock) stock holdings
and it is used to disclose information to shareholders about affiliate's holdings. A Form 3
must also be filed when a person becomes an affiliate of a company within 10 days of
when the person becomes an affiliate. Form 4 is used when affiliates of a company
(officers, directors, and those that own more 10% of the company) buy and sell the
company's securities. Form 5 is the annual statement of beneficial ownership holdings.
Form 10 is a general securities registration form.
Debt to Equity Ratio - ANS-Debt to Equity = Total Liabilities/Shareholders' Equity
(153.3/175.4 = .87). Debt to Equity measures the financial leverage of a company.
When the ratio is greater than 1, the majority of assets are financed through debt. When
the ratio is smaller than 1, the majority of assets are financed through equity.
8-K Triggering Events - ANS-• Entry into, or termination of, a "material definitive
agreement"
• Bankruptcy or receivership
• Completion of acquisition or disposition of assets
• Disclosure of results of operations and financial condition
• The creation, acceleration, or increase in amount of a direct financial obligation or
obligation under an off-balance sheet arrangement
• Material impairments
• Notice of delisting or transfer of listing
• Material modification to the rights of security holders
• Conclusion of non-reliance on previously issued financial statements or a related audit
report or completed interim review
• Change in fiscal year
• Submission of matters to a vote of security holders
• Regulation FD disclosure (see discussion of Regulation FD in Section 2)
• Other events that are not specifically called for but that the registrant considers to be
of importance to stockholders
• Form 8-K also includes a section for a list of any financial statements and exhibits filed
as part of the report, such as the financial statements of a business the registrant
acquired. Generally, a company has four days after a triggering event occurs to file a
Form 8-K reporting the event.
• 8-Ks are key sources of information about financial updates that occur between
quarterly statements, and about merger and acquisition activity involving the company.
Signs of Recovering Economy - ANS-To detect an encouraging sign of recovery in the
economy we need to look toward leading indicators. Leading indicators are indicators
that change in advance of the economy as a whole. Coincident indicators, in contrast,
are indicators that change with the economy. Lagging indicators are indicators that
reflect change after it occurs in the wider economy. The producer price index (PPI) and
the GDP are both coincident indicators, whereas the CPI is a lagging indicator.
Moreover, an increase in the PPI would be an unfavorable condition for a manufacturing
business as would an increase in prices of raw materials. Initial claims for
unemployment (as well as continued claims for employment) are considered leading
indicators, and when we see a reduction in this number it often signals an improvement
in the economy. Note that this statistic is different from the unemployment rate which is
a lagging indicator.
ADR - ANS-When the dollar is strong, the foreign currency doesn't work out to many
dollars when exchanged. When the dollar is weak, the foreign currency would exchange
into more dollars. Bottom line, owner of an ADR is better off with a weak dollar.
The SEC writes "the stocks of most foreign companies that trade in the U.S. markets
are traded as American Depositary Receipts (ADRs). U.S. depositary banks issue these
stocks. Each ADR represents one or more shares of foreign stock or a fraction of a
share. If you own an ADR, you have the right to obtain the foreign stock it represents,
but U.S. investors usually find it more convenient to own the ADR. The price of an ADR
corresponds to the price of the foreign stock in its home market, adjusted to the ratio of
the ADRs to foreign company shares."
Stock splits - ANS-Stock splits and stock dividends do not decrease assets, only the par
value per share and the number of shares outstanding change. Cash dividends,
however, are paid using current assets.
***Debt to Equity Ratio
VERY IMPORTANT - ANS-The debt-to-equity ratio (D/E) measures how a company's
assets are financed (the proportion financed by debt vs equity). The accounting
equation is Assets equals Debt plus Equity (A = D + E.) Solving for E, we see that E = A
- D, therefore, D/(A-D) is true. Similarly, solving for D, we see that D = A - E, therefore,
(A-E)/E is true. The other options are not true. You should have this basic accounting
equation, A = D + E, firmly in memory if you want to pass the test.;
Fully Diluted Shares Equation - ANS-Fully diluted shares = Basic Shares outstanding +
In-the-money option shares - Treasury shares that can be bought back + convertible
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