Exam 4: Chapter 4 and Chapter 7 (Break-Even Analysis)

equity capital

represents capital that belongs to the owners of the business, this includes retained earnings as well as common and preferred stocks

debt capital

represents capital borrowed from sources outside of the company, with the principal and interest paid at a specified time schedule. this includes borrowings through bonds issues, loans, and mortgages.

Stocks

represent ownership of shares in a company; it represents a claim on the company’s assets and earnings.

common stock (ordinary shares)

are the majority of stocks issued by a corporation. it represents ordinary ownership with the return on investment influenced by the success or failure of the business

common stock holders

are given voting rights to elect the members of the board of directors, who oversee the major decisions made by management

preferred stock (preference shares)

are stocks that guarantee the owner a fixed and regular dividend forever.

preferred shareholders

are paid before common shareholders in terms of dividend distribution and in case of liquidation. however, they have no voting privileges, it can not benefit as much from company profits since they are paid a fixed a diviednd payment and they may be callable

Callable

where a company has the option to repurchase the shares at anytime for any reason

initial public offering (ipo)

is the first sale of stock issued by a private company

share

a unit of stock

stock broker

acts as a consultant and sales agent who executes the orders to buy and sell stocks depending on the instructions of the client

stock exchange

an association with specific rules and regulations where stock brokers meet for the purpose of trading stocks, bonds and other forms of securities

securities and exchange commission (sec)

the government agency responsible for the regulation and disclosure of the financial practices of corporations in connection with the buying and selling of stocks and bonds

blue chips

are the large and stable corporations that account for a huge amount of trading in an exchange

dividends, Div

the share of company earnings that a company gives its shareholders, this is usually distributed annually

principal, P

the initial amount invested in a stock

cost of capital, i

the rate paid by the company for the use of funds acquired through the sale of stocks and bonds

reselling price, R

the amount for which a stock is sold, which is usually done when its value appreciates in the open market

par value or face value, F

is the amount due to a shareholder in the event of liquidation

growth rate, g

the rate by which the future income from an investment is expected to increase

holding period

the period from the date a share is acquired to the date it is traded or sold

bonds

are financial instruments that bear interest. they are issued by commercial and financial institutions or by local and national government to raise funds necessary to finance improvement projects or expansion activities

bond

a written contract between a borrower and lender in which the borrower promises to make periodic payments at a specified rate of interest, and repay the principal at the maturity date

treasury bonds

are bonds issued and backed by the national government. they are considered low-risk and their interest are usually exempt from income taxes

secured or mortgage bonds

are bonds for which specified assets of the company have been pledged in order to guarantee repayment. in the event that the company is unable to settle its obligations with the bond holders, the bond holders have the option of foreclosing the mortgaged properties upon maturity

debentures or unsecured bonds

are bonds for which no form of collateral is pledged. these bonds are backed by the full faith of the investor in the reputation and financial stability of the company

convertible bonds

are bonds that can be traded for, or converted to, common stock or other securities after a specified period of time

junk bonds

are bonds issued by companies in weak financial condition with large amount of debt already outstanding; these bonds yield high rates of return because of the high risk

coupon bonds

are unregistered bonds for which the bond holders receive periodic interest payment by clipping a coupon from the bond and sending it to the issuer as evidence of ownership

zero-coupon bonds

are bonds that do not pay any periodic interest. these bonds are often sold at very high discounts so that their yield to maturity will be adequate to attract investors

current value or selling price, P

is the actual purchase price for the bond, which varies with latest market interest rate

par value or face value, F

os the bond denomination, usually in multiples of P1000. it is the amount on which interest is computed for the required periodic payments, and unless otherwise indicated it is also the price of redemption, R, upon maturity

bond discount, Bd

is the difference between the face value and the selling price of the bond when it is sold below its face valuee

bond premium, Bp

is the difference between the selling price and the face value of the bond when it is sold above its face value

bond rate, rn

is the applied nominal rate on the periodic payments due

current yield or coupon rate, y

is the immediate rate of return experienced from the bond investment from the date of purchase until the time the bond is retired

yield to maturity, ie

is the effective rate of return experienced from the bond investment from the date of purchase until the time the bond is retired

maturity date

is the date on which the bond becomes due

flotation cost

is the total cost incurred by a company when it issues a bond or stock to the public. these includes legal fees, underwriter fees and registration fees

bond ownership

is evidenced by a bond certificate that stipulates the terms of the contract between the issues(borrower) and the bond purchaser (lender), in which the owner is guaranteed to receive two types of payments, uniform series of payments, Fr, and final payment equal to redemption price, R

Break-even

often used in business literature to describe a situation where the income generated is just enough to cover all expenses incurred by the business

break-even point

the purpose of break even analysis is to determine this which is the level of production output at which total income would equal the total cost of production and sales

loss

level of production below the break even point

profit

level of production above break even point

fixed costs, CF

are expenses that remain stable within a specified range of production and sales levels.

fixed costs, CF

such costs include rent, realty and business taxes, insurance, building and equipment depreciation, interest on loans, cost of office utilities, administrative and supervisory personnel salaries, and many others that remain constant regardless of the production level

variable costs, Cv

are expenses that change in direct proportion with the level of production

variable costs, Cv

such costs include direct materials and labor costs, warranty, production power and fuel costs, shipping costs, and sales commission expenses

total costs, CT

is the sum of the fixed costs and variable costs for a specified production output

unit price, S

is the amount charged to a customer for each unit sold

gross sales, GS

is the product of the number of units sold and the selling price per unit

gross profit or loss

is the monetary gain or loss resulting from the difference of the gross sales and total costs

contribution margin, Mc

is the amount available to offset fixed costs of production and is equal to the gross sales less the variable costs.