FINMAN - FINALS (copy)

Matching Approach

A match is established between the expected lives of current asset to be financed with the source of funds raised to finance the current assets.

Conservative Approach

It takes an edge over and above matching approach, as it is practically not possible to plan an exact match in all cases. It depends more on long-term financial sources for meeting it's financial needs.

Aggressive Approach

It depends relatively more an short-term sources than warranted by the matching plan. Under this approach the firm finance not only its temporary current assets but also a part of permanent current assets with short-term sources of finance.

Spontaneous Liabilities

the obligations of a company that are accumulated automatically as a result of the company's day-to-day business.

Accounts Payable and Accruals

Types of Spontaneous Liabilities

Bank Finance

The major source for financing current assets

Loan arrangement, Overdraft arrangement, Cash credit arrangement, Bills purchased and bills discounted, Letter of credit

The various ways in which the banks finance current assets are:

Public Deposits

Refer to the unsecured deposits invited by companies from the public mainly to finance working capital needs.

Trade Credit

Arises when a supplier of goods or services allows customers to pay for goods and services at a later date.

Commercial Paper

A short term money market instrument issued by big corporations for meeting short term liabilities and financing current assets.

Promissory Notes

Debt instruments written by one party to another that promise to pay a specific amount of money by a certain date. Notes are a common way for companies to issue commercial paper.

Drafts

A written agreement between three parties: a bank (the drawer), a payer (the drawee), and a payee.The bank instructs the commercial paper issuer to pay the lender (payee) a specific amount of money at a specific time.

Intercorporate Deposits

It indicates unsecured short-term funding raised by one company from another company. They are dependent on personal contacts.

Call Deposit

Such a type of deposit is withdrawn by the lender by giving a notice of one day. However, in practice, a lender has to wait for at least 3 days.

Three-month Deposit

This type of a deposit provides funds for three months to meet up short-term cash inadequacy.

Six-month Deposit

The lending company provides funds to another company for a period of six months.

Debt Financing

Firm raises money for working capital by selling debt instruments to individuals and/or institutional investors. Individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

Installment Loans

They have set repayment terms and monthly payments.

Revolving Loans

Provide access to an ongoing line of credit that a borrower can use, repay, and repeat.

Cash Flow Loans

Provide a lump-sum payment from the lender.

Term Loans

Commonly used by small businesses to purchase fixed assets, such as equipment or a new building.

Term Loans

Provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms.

Short-term Loans

Run less than a year, though they can also refer to a loan of up to 18 months.

Intermediate-term Loans

Run between one to three years and are paid in monthly installments from a company’s cash flow.

Long-term Loans

Last anywhere between three to 25 years.

Public offering, using an investment bank serving as a security underwriter or through private placement to a small group of investors

The initial or primary sale of corporate bond issues occurs either through:

Competitive Sale

The investment bank can purchase the bonds through competitive bidding against other investment banks or by directly negotiating with the issuer.

Negotiated Sale

A single investment bank obtains the exclusive right to originate, underwrite and distribute the new bonds through a one-on-one negotiation process.

Best Efforts Underwriting Basis

The underwriter does not guarantee a firm price to the issuer. The investment bank incurs no risk of mispricing the security since it simply seeks to sell the securities at the best market price it can get for the issuing firm.

Credit Quality Risk

It is the chance that the bond issuer will not be able to make timely payments.

Bond Ratings

favorably affected by : a low utilization of financial leverage profitable operations, a low variability of financial earnings large firm size, Little use of subordinated debt

Bond Ratings

Involve about a judgement about the future risk potential provided by rating agencies.

Corporate Credit Ratings

Based on a firm's financial statements, including the
specific company’s capital structure, credit payment history, revenue, and earnings. Meant to help assess the firm's ability to pay its debts.

FICO Score

Used by lenders to help make accurate, reliable, and fast
credit risk decisions across the customer lifecycle.

Moody's and Standard & Poor's

Also issue credit quality ratings for all types of firms in the credit market.

Debenture Bonds, Subordinate Debenture, Income Bonds

Unsecured long term bonds

Mortgage Bonds

Secured long term bonds

Variable Rate Funds, Junk Bonds, Eurobonds, Treasury Bonds

Other types of bonds

Debenture Bonds

Unsecured long-term debt and backed only by the reputation and financial stability of corporation.

Subordinate Debenture

Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been statisfied

Income Bonds

Bonds that require interest payments only if earned and non-payment of interest does not lead to bankruptcy

Mortgage Bonds

Bonds secured by a lien on a real properties

First Mortgage Bonds

Have the senior claim on the secured assets if the same property has been pledged on more than one mortgage bond

Second Mortgage Bonds

Have the second claim on assets and are paid only after the claims of the first mortgage bonds have been satisfied

Blanket Bonds

All the assets of the firm are used as security

Closed-end Mortgage

bonds that forbid further use of pledged assets security for other bonds

Open-end Mortgage

bonds that allow the issuance of additional mortgage bonds using the same secured assets as security

Limited Open-end

bonds that allow the issuance of additional bonds up to a limited amount at the same time priority level using the
already mortgaged assets as security

Variable Rate Bonds

one in which interest payment changes with market conditions

Junk Bonds

are high-risk, high yield bonds issued by entities that are heavily indebted or otherwise in weak financial condition

Treasury Bonds

bonds that carry the "full-faith-and-credit" backing of the government and investors consider them among the
saftest fixed-ncome investment

Eurobonds

bonds payable or denominated in the borrower;s currency but sold outside the country of the borrower

Serial payments, Call provision, Conversion, Bond refunding

methods of retiring debt

Serial payments

bonds with serial payment provision are paid off in installments over the life of the issue

Call provision

This method allows the corporation to restore or force in the debt issue before the maturity

Conversion

A more subtle method of reducing debt outstanding is to provide for debt conversion into common stock

Bond refunding

It is the process of retiring an old bond issue before maturity and replacing it with a new issue

Preferred Shares/Stocks

A class of stock that is granted superior rights to common stocks, like higher dividend payments and a higher claim to asset in the event of liquidation.

Preferred shareholders

have priority over common stockholders when it comes
to dividends, which generally yield more than common stock and can be paid monthly or quarterly.

Adjustable-rate shares

specify certain factors that influence the dividend
yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company's profits.

Ordinary Shares

A form of long-term equity that represents the ownership interest of the firm.

FINITE PERIOD DIVIDEND
VALUATION

This model assumes that an investor plans to purchase an ordinary share and hold it for a specific amount of time

INFINITE PERIOD DIVIDEND
VALUATION

This model assumes that an investor plans to purchase an ordinary share and hold it indefinitely.

Zero Growth Dividend Model

assumes dividends remain a fixed amout over time.

Gordon Constant Growth Dividend Model

assumes dividends grow at a constant rate each period

Supernormal Growth Dividend Model

assumes that dividends grow at an above normal rate over some time period and then grow at a normal rate thereafter

Book value per share

the amount per share of ordinary shares that would be
received if all of the organisation’s assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preference shares) were divided among the ordinary stockholders.

Liquidation value per share

the actual amount per share of ordinary shares that would be received if all of the organisation’s assets were sold for their market value, liabilities (including preference shares) were paid, and any remaining money was divided among the ordinary shareholders

finance lease

a lease that transfers substantially all of the risks and rewards incidental to ownership of an underlying asset

Present value method

the present value of the rentals against the present value of acquiring the asset through a loan is compared; the lower between the two alternatives is chosen.

Cost of Capital method

the rate of cost of capital relating to the instalment is compared to the cost of capital of other available sources such as fresh issue of equity capital, debentures, retained earnings, term loans, and so forth; the lower rate between the alternatives is chosen.

Bower - Herringer - Williamson method

present value of gross rentals discounted using cost of debt (financial advantage/disadvantage) is compared
with the comparative tax benefit discounted using the cost of capital (operating advantage/disadvantage)

Capital gain

is the difference between your purchase price and the value of the investment when you sell it.

Dividend

is a payout to shareholders from the profits of a company.

Dividend Policy

decision to pay out or retain earnings

investment opportunities available to the firm, alternative sources of capital, and stockholders' preferences for current versus future income.

factors influenced dividend policy,

The Dividend Policy Irrelevance Theory

It has been agreed that dividend policy has no effect
on either the price of a firm's stock or its cost of
capital - that is that dividend policy is irrelevant.

Melton Miller and Franco
Modigliani

The principal proponents of the dividend policy
irrelevance theory

Melton Miller and Franco
Modigliani

They argue that the only important determinants of a company's market value are the expected level and risk of its cash flows or the income produced by its assets, not on how this income is split between dividends and retained earnings.

The Dividend Policy Relevance Theory

in a world with market imperfections such as taxes, flotation costs, and transaction costs, a company's dividend policy affects its market value.

information content effect

the reaction of the market to dividend action may
affect stock prices favorably or unfavorably depending on
the inferences and conclusions drawn by investors.

clientele effect

the observable fact that stocks attract particular groups based on dividend yield and resulting tax effects should. Investors are attracted to firms whose dividend policies meet their particular needs.

Stable dividend policy

the easiest and most commonly used. The goal of the policy is a steady and predictable dividend payout each
year, which is what most investors seek. Whether earnings are up or down, investors receive a dividend.

Constant Dividend Policy

a company pays a percentage of its earnings as dividends every year. In this way, investors experience the full volatility of company earnings.

Constant dividend payout ratio policy

a dividend policy in which the percentage of earnings paid in the form of dividends is held constant.

Regular dividend plus extra policy

one in which a firm maintains a low regular dividend
plus extra dividend, if warranted by the firm's earnings performance.

Distribution

used when sources are made other than current
accumulated retained earnings.

Dividend

usually refers to cash paid out of earnings.

Regular cash dividends

cash is the most common type of dividend. commonly,
companies pay regular cash 4x a year.

Extra dividends

Sometimes, the firm will also pay an “extra” cash
dividend. By this, an extra part may or may not repeat
in future.

Special dividends

Unusual/one-time event.

Liquidating dividends

Some or all of the business has been liquidated (sold off)

Declaration date

Board of directors meets, decides to pay dividends and announces the specifics of its decision.

Record date

The firm closes its stock transfer books. Makes up a list of shareholders who are eligible to receive the declared dividend.

Ex-dividend date

A date on which the right to the most recently
declared dividend no longer goes along with the
sale of stock. The stock will sell ex-dividend for four business days prior to the record date.

Payment date

The company distributes its dividend checks to
the holders of record. Usually set at 2-4 weeks after the record date.

Stock dividend

represents a form method of paying dividends. It is a proportional distribution by a corporation of its own stock to its stockholder.

Stock split

an increase in the number of authorized issued and outstanding shares of stock, coupled with a proportionate
reduction in the stock's par value.

Stock Repurchase

The act of a firm buying back its own shares of ordinary equity shares

OPEN MARKET PURCHASES, TENDER OFFER, NEGOTIATED OR TARGETED REPURCHASE

How or from where do they buyback these stocks?