Professional Documents
Culture Documents
Definition
Document prepared by the sponsor of a new investment project, or the management of an
existing firm, for prospective investors and/or lenders. It details the (1) nature of the project
or business, (2) its history (if any), (3) growth potential, (4) objectives and the amount of
finance required to realize them, (5) promised collateral or security, and (6) a plan for timely
repayment of interest and principal.
The main benefit of capital rationing is budgeting a company's corporate resources. When a
company issues stock or borrows money , it can use these resources for new investments.
However, if the company does not see a good return on investments, it is wasting these
resources. By capital rationing, which is the process of increasing the cost of capital, the
company can make sure it takes on fewer projects. Further, it can take on only projects for
which the anticipated return on investment is high. This will prevent the company from
over-extending its finances, which would cause a decrease in stock price and stability.
Read more: http://www.finweb.com/financial-planning/what-is-capitalrationing.html#ixzz38VlyeJ1p
Definition of 'Capital Structure'
Definition of 'Portfolio'
A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual,
exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or
managed by financial professionals.
Answer:
The market price per share of stock or the price per share of stock is a current measure of
price not an accounting, or historical, measure of the value of stock like the book value per
share, which is based on the information from a company's balance sheet. The market price
per share is a financial metric that investors use to determine whether or not to purchase a
stock.
Calculation of Market Price Per Share
There are several steps you must take in order to calculate the market price per share. The
first step is to determine the date on which you want to calculate the market price per share.
The second step is to find the price on that particular date. You can look at the company's
monthly, quarterly, or annual report to get the stock price on that particular date.
Third, you must consider the preferred stock, if any, that this company owns. If the company
owns and has paid dividends on its preferred stock, subtract those dividends from the stock
price you have found from the financial report. Fourth, determine the number of shares of
stock outstanding by looking at the company's quarterly or annual report.
After you have gone through these four steps, you have the information you need to calculate
the market price per share. Step 3 gives you the numerator of the equation and Step 4 gives
you the denominator of the equation:
Market Price Per Share = Net Income - Preferred Dividends/Number of Shares of Common
Shares Outstanding = $________
Interpretation of Market Price Per Share vs Current Trading Price
The market price per share and the current price at which the stock is being traded are not
necessarily the same. The market price per share is also called the intrinsic value of a share of
stock or the actual value based on the actual variables taken from the company's financial
statements. The current trading price is based on investor buying and selling behavior. If
investors are paying more than the intrinsic value, then the stock is overvalued. If investors
are paying less than the intrinsic, then the stock is undervalued and is a good buy.
The the sum of declared dividends for every ordinary share issued. Dividend
per share (DPS) is the total dividends paid out over an entire year (including
interim dividends but not including special dividends) divided by the number
of outstanding ordinary shares issued.
DPS can be calculated by using the following formula:
Dividends per share are usually easily found on quote pages as the dividend
paid in the most recent quarter which is then used to calculate the dividend
yield. Dividends over the entire year (not including any special dividends)
must be added together for a proper calculation of DPS, including interim
dividends. Special dividends are dividends which are only expected to be
issued once so are not included. The total number of ordinary shares
outstanding is sometimes calculated using the weighted average over the
reporting period.
For example: ABC company paid a total of $237,000 in dividends over the
last year of which there was a special one time dividend totalling $59,250.
ABC has 2 million shares outstanding so its DPS would be ($237,000$59,250)/2,000,000 = $0.0889 per share.
Dividends are a form of profit distribution to the shareholder. Having a
growing dividend per share can be a sign that the company's management
believes that the growth can be sustained.
DEFINITION
A performance measure used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments. To calculate ROI,
the benefit (return) of an investment is divided by the cost of the investment; the
result is expressed as a percentage or a ratio.
In the above formula "gains from investment", refers to the proceeds obtained
from selling the investment of interest. Return on investment is a very popular
metric because of its versatility and simplicity. That is, if an investment does not
have a positive ROI, or if there are other opportunities with a higher ROI, then
the investment should be not be undertaken.
Definition of 'Cost Of Capital'
The cost of funds used for financing a business. Cost of capital depends on
the mode of financing used it refers to the cost of equity if the business is
financed solely through equity, or to the cost of debt if it is financed solely
through debt. Many companies use a combination of debt and equity to
finance their businesses, and for such companies, their overall cost of capital
is derived from a weighted average of all capital sources, widely known as
the weighted average cost of capital (WACC). Since the cost of capital
represents a hurdle rate that a company must overcome before it can
generate value, it is extensively used in the capital budgeting process to
determine whether the company should proceed with a project.
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The cost of various capital sources varies from company to company, and
depends on factors such as its operating history, profitability, credit
worthiness, etc. In general, newer enterprises with limited operating histories
will have higher costs of capital than established companies with a solid track
record, since lenders and investors will demand a higher risk premium for the
former.
Every company has to chart out its game plan for financing the business at
an early stage. The cost of capital thus becomes a critical factor in deciding
which financing track to follow debt, equity or a combination of the two.
Early-stage companies seldom have sizable assets to pledge as collateral for
debt financing, so equity financing becomes the default mode of funding for
most of them.
The cost of debt is merely the interest rate paid by the company on such
debt. However, since interest expense is tax-deductible, the after-tax cost of
debt is calculated as: Yield to maturity of debt x (1 - T) where T is the
companys marginal tax rate.
The cost of equity is more complicated, since the rate of return demanded by
equity investors is not as clearly defined as it is by lenders. Theoretically, the
cost of equity is approximated by the Capital Asset Pricing Model (CAPM) =
Risk-free rate + (Companys Beta x Risk Premium).
The firms overall cost of capital is based on the weighted average of these
costs. For example, consider an enterprise with a capital structure consisting
of 70% equity and 30% debt; its cost of equity is 10% and after-tax cost of
debt is 7%. Therefore, its WACC would be (0.7 x 10%) + (0.3 x 7%) = 9.1%.
This is the cost of capital that would be used to discount future cash flows
from potential projects and other opportunities to estimate their Net Present
Value (NPV) and ability to generate value.
Companies strive to attain the optimal financing mix, based on the cost of
capital for various funding sources. Debt financing has the advantage of
being more tax-efficient than equity financing, since interest expenses are
tax-deductible and dividends on common shares have to be paid with aftertax dollars. However, too much debt can result in dangerously high leverage,
resulting in higher interest rates sought by lenders to offset the higher
default risk.
Differences Between Sole Proprietorship, Partnership and Corporation
by Christopher Carter, Demand Media
A sole proprietorship is a business that has a single owner who is responsible for making
decisions for the company. A partnership consists of two or more individuals who share the
responsibility of running the company. A corporation is one of the most recognizable business
structures and has a separate identity from the owners of the company. One or more owners
may participate as shareholders of a corporation.
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Formation
A partnership business automatically begins when two or more people decide to go into
business. Sole proprietorships begin automatically when a single business owner decides to
open a business. There are no documents to file to begin a sole proprietorship or a
partnership. However, businesses are required to file articles of incorporation, also known as
a certificate of formation, to legally form a corporation in any state. Each state charges a fee,
which varies from state to state, to file articles of incorporation. In addition, corporations are
required to register with each state where the company intends to make business transactions.
This requirement is not imposed on sole proprietorships or partnerships.
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Liability
Sole proprietors and partners in a partnership business have unlimited liability for all debts
and liabilities that occur while operating the business. This means partners and sole
proprietors may lose their homes, cars and other personal assets, if the company's assets are
insufficient to cover the company's debts. Corporations provide owners of the company with
limited liability protection against business losses and obligations. This means owners of a
corporation will not lose their home, if the company goes bankrupt. Owners of a corporation
are liable for company debts and obligations up to the extent of their investment in the
company.
Related Reading: The Advantages of Going From a Sole Proprietorship to a Limited
Partnership
Taxation
Partnerships and sole proprietorships are referred to as pass-through entities. This is because
sole proprietors and partners in a partnership report their share of company profits and losses
directly on their personal income tax return. Sole proprietorships and partnerships are not
required to file business taxes with the Internal Revenue Service. Corporations are subject to
double taxation. This occurs when the corporation pays taxes on the company's profits at the
business level, and shareholders pay taxes on income received from the corporation on their
personal tax return.
Structure
Formalities
Partnerships and sole proprietorships have far less paperwork and fewer ongoing formalities
to adhere to in comparison to a corporation. Corporations are required to hold at least one
annual meeting, while sole proprietorships and partnerships do not have to hold company
meetings. A corporation must keep strict financial records and keep a ledger detailing how the
company reached certain decisions. Unlike a corporation, sole proprietorships and
partnerships are not required to file annual reports with the state or create financial
statements.
The main difference between cooperative organisation and company organisation are
given below:
1. Basic objects:
The primary objective of a cooperative society is to provide service, whereas a company
seeks to earn profits. This does not mean that a cooperative society does not earn profits or a
company does not render service to society.
It simply means that all the activities of a cooperative society are guided by service motive
and profits are incidental to this objective. On the other hand, the activities of a company are
inspired by profit taking and services rendered to society are incidental to profit motive.
2. Number of members:
The minimum number of persons is 7 in a public company and 2 in a private company. A
cooperative requires at least 10 members. The maximum number of members is 50 in a
private company and 100 in cooperative credit society. There is no maximum limit in case of
public companies and non-credit cooperative societies.
3. Member's liability:
The liability of members of a company is generally limited to the face value of shares held or
the amount of guarantee given by them though the Companies Act permits unlimited liability
to companies. The members of a cooperative society can opt for unlimited liability. But in
practice their liability is generally limited.
4. Membership:
The membership of a cooperative society is open at all times and new members have to pay
the same amount per share as old ones have paid. A company, on the other hand, closes the
list of members as soon as its capital is fully subscribed. People who want to become
members later on have to buy shares at the stock exchange.
5. Management and control:
The management of a cooperative society is democratic as each member has one vote and
there is no system of proxy. In a company, the number of votes depends upon the number of
shares and proxies held by a member.
There is little separation between ownership and management in a cooperative society due to
limited and local membership.
6. Distribution of surplus:
The profits of a company are distributed as dividends in proportion to the capital contributed
by the members.
In a cooperative society a minimum part of surplus must be set aside as a reserve and for the
general welfare of the public. The rest is distributed in accordance with the patronage
provided by different members after paying dividend up to 10 per cent on capital.
7. Share capital:
In a company, one member can buy any number of shares but an individual cannot buy more
than 10 per cent of the total number of shares or shares worth Rs. 1,000 of a cooperative
society.
A public company must offer new shares to the existing members while a cooperative society
issues new shares generally to increases its membership.
The subscription list of a cooperative society is kept open for new members whereas, the
subscription list of a company is closed after subscriptions. A company is thus capitalistic in
nature while a cooperative society is socialistic.
8. Transferability of interest:
The shares of a public limited company are freely transferable while the shares of cooperative
society cannot be transferred but can be returned to the society in case a member wants to
withdraw his membership.
A member of a cooperative society can withdraw his capital by giving a notice to the society.
A shareholder, on the other hand, cannot demand back his capital from the company until it's
winding up.
9. Coverage:
A cooperative society generally draws its membership from a limited local area. The
members have common bond in the form of a common occupation or employer or locality. In
a company members have no such relationship and are usually drawn from different parts of
the country and even from abroad.
10. Exemptions and privileges:
A cooperative society enjoys several exemptions and privileges regarding income tax, stamp
duty, etc. This is because the Government seeks to encourage the growth of the cooperative
movement.
No such exemptions, privileges and assistance is available to a public limited company. A
private limited company, however, enjoys a number of exemptions and privileges under the
Companies Act.
11. Governing statute:
A company is governed by the Companies Act, 1956 while a cooperative organisation is
subject to the provisions of the Cooperative Societies Act, 1912 or State Cooperative
Societies Acts.
Formation of a Cooperative Society
In order to get a Cooperative society registered, an application in the prescribed form must be
submitted to the Registrar of Cooperative Societies of the State in which the society's registered office is to be situated.
Any ten persons above the age of 18 years and having common interest may submit a joint
application for being formed into a Cooperative society. The application should contain the
following information:
(i) The name and address of the society.
(ii) The aims and objects for which the society is being registered.
3. Secretary
4. Joint Secretary, if any, and
5. Treasurer.
The general body of shareholders lays down the broad objectives and policies of the cooperative society. The managing committee determines detailed programmes and procedures
of the society.
The committee also gets progress reports from the office-bearers and it is accountable to the
annual general meeting of members. The office-bearers of the society work mainly in an
honorary capacity.
The annual accounts of the society are audited and its annual report is submitted to the
Registrar of Cooperative Societies.
Definition of 'Registrar'
The role of the registrar is to make sure that the amount of shares
outstanding in the market matches the amount of shares authorized by the
company. For bonds, the registrar also makes sure that the company's
obligation from a bond issue is certified as being an actual legal obligation.
Definition of 'Agency Costs'
A type of internal cost that arises from, or must be paid to, an agent acting
on behalf of a principal. Agency costs arise because of core problems such as
conflicts of interest between shareholders and management. Shareholders
wish for management to run the company in a way that increases
shareholder value. But management may wish to grow the company in ways
that maximize their personal power and wealth that may not be in the best
interests of shareholders.
Definition of 'Debenture'
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.
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.
Definition of 'Capital Markets'
Markets for buying and selling equity and debt instruments. Capital
markets channel savings and investment between suppliers of capital such
as retail investors and institutional investors, and users of capital like
businesses, government and individuals. Capital markets are vital to the
functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets,
where new stock and bond issues are sold to investors, and secondary
markets, which trade existing securities.
The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter Exchange of
India, is based in Mumbai, Maharashtra. It is India's first exchange for small companies,[3] as
well as the first screen-based nationwide stock exchange in India.[4] OTCEI was set up to
access high-technology enterprising promoters in raising finance for new product
development in a cost-effective manner and to provide a transparent and efficient trading
system to investors.[5]
OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment
Corporation of India, the Industrial Development Bank of India, the Industrial Finance
Corporation of India, and other institutions, and is a recognised stock exchange under the
SCR Act.
OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is
recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956.
The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost
effective manner and to provide investors with a transparent & efficient mode of trading.
Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to
the Indian capital markets such as screen-based nationwide trading, sponsorship of companies,
market making and scripless trading. As a measure of success of these efforts, the Exchange today
has 115 listings and has assisted in providing capital for enterprises that have gone on to build
successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.
In other words, if a taxpayer has a tax issue with the IRS, that person,
before completing a certain action (i.e. paying the required taxes), can
request the IRS to rule on that tax issue. The private letter ruling is the
letter the IRS sends back to the taxpayer, which explains the rulings and the
rational for the decision. The PLR is specific and applicable to that tax
situation and that taxpayer only. Moreover, private letter rulings of other
taxpayers cannot be used as precedence by a person requesting a ruling
regarding his or her own issue, and in no way binds the IRS to take a similar
position when dealing with different taxpayers
Definition of 'Depreciation'
1. A method of allocating the cost of a tangible asset over its useful life.
Businesses depreciate long-term assets for both tax and accounting
purposes.
2. A decrease in an asset's value caused by unfavorable market conditions.
Investopedia explains 'Depreciation'
Definition of 'Amortization'
1. The paying off of debt with a fixed repayment schedule in regular installments over a period
of time. Consumers are most likely to encounter amortization with a mortgage or car loan.
2. The spreading out of capital expenses for intangible assets over a specific period of time
(usually over the asset's useful life) for accounting and tax purposes. Amortization is similar to
depreciation, which is used for tangible assets, and to depletion, which is used with natural
resources. Amortization roughly matches an assets expense with the revenue it generates.
Investopedia explains 'Amortization'
1. With auto loan and home loan payments, at the beginning of the loan
term, most of the monthly payment goes toward interest. With each
subsequent payment, a greater percentage of the payment goes toward
principal. For example, on a 5-year, $20,000 auto loan at 6% interest, the
first monthly payment of $386.66 would be allocated as $286.66 to principal
and $100 to interest. The last monthly payment would be allocated as
$384.73 to principal and $1.92 to interest. At the end of the loan term, all
principal and all interest will be repaid.
2. Suppose XYZ Biotech spent $30 million dollars on a patent with a useful
life of 15 years. XYZ Biotech would record $2 million each year as an
amortization expense.
The IRS allows taxpayers to take a deduction for the following amortized
expenses: geological and geophysical expenses incurred in oil and natural
gas exploration, atmospheric pollution control facilities, bond premiums,
research and development, lease acquisition, forestation and reforestation,
and certain intangibles such as goodwill, patents, copyrights and
trademarks. Amortization can be calculated easily using most modern
financial calculators, spreadsheet software packages such as Microsoft
Excel or amortization charts and tables.
Definition of 'Bankruptcy'
yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).
Investopedia explains 'Opportunity Cost'
1. The opportunity cost of going to college is the money you would have
earned if you worked instead. On the one hand, you lose four years of salary
while getting your degree; on the other hand, you hope to earn more during
your career, thanks to your education, to offset the lost wages.
Here's another example: if a gardener decides to grow carrots, his or her
opportunity cost is the alternative crop that might have been grown instead
(potatoes, tomatoes, pumpkins, etc.).
In both cases, a choice between two options must be made. It would be an
easy decision if you knew the end outcome; however, the risk that you
could achieve greater "benefits" (be they monetary or otherwise) with
another option is the opportunity cost.
production decreases. Variable costs differ from fixed costs such as rent, advertising, insurance
and office supplies, which tend to remain the same regardless of production output. Fixed costs
and variable costs comprise total cost.
The face value of a bond. Par value for a share refers to the stock value
stated in the corporate charter. Par value is important for a bond or fixedincome instrument because it determines its maturity value as well as the
dollar value of coupon payments. Par value for a bond is typically $1,000 or
$100. Shares usually have no par value or very low par value, such as 1
cent per share. The market price of a bond may be above or below par,
depending on factors such as the level of interest rates and the bonds
credit status. In the case of equity, par value has very little relation to the
shares' market price.
Also known as nominal value or face value.
nvestopedia explains 'Par Value'
For example, a bond with par value of $1,000 and a coupon rate of 4% will
have annual coupon payments of $40. A bond with par value of $100 and a
coupon rate of 4% will have annual coupon payments of $4.
One of the main factors that causes bonds to trade above or below par
value is the level of interest rates in the economy, as compared to the
bonds coupon rates. A bond with a 4% coupon will trade below par if
interest rates are at 5%. This is because in such a scenario, investors have a
choice of buying similar-rated bonds that have a 5% coupon. The price of a
lower-coupon bond therefore must decline to offer the same 5% yield to
investors. Likewise, a bond with a 4% coupon will trade above par if interest
rates are at 3%.
A bond that is trading above par is said to be trading at a premium, while a
bond trading below par is regarded as trading at a discount. During periods
when interest rates are low or have been trending lower, a larger proportion
of bonds will trade above par or at a premium. When interest rates are high,
a larger proportion of bonds will trade at a discount.
If an investor buys a taxable bond for a price above par, the premium can
be amortized over the remaining life of the bond, offsetting the interest
received from the bond and hence reducing the investors taxable income
from the bond. Such premium amortization is not available for tax-free
bonds purchased at a price above par.
Par value, in finance and accounting, means stated value or face value.
A bond selling at par is priced at 100% of face value. Par is also used to refer to
its original issue value or its value upon redemption at maturity. This amount is
Venture capital can also include managerial and technical expertise. Most
venture capital comes from a group of wealthy investors, investment
banks and other financial institutions that pool such investments or
partnerships. This form of raising capital is popular among new companies
or ventures with limited operating history, which cannot raise funds by
issuing debt. The downside for entrepreneurs is that venture capitalists
usually get a say in company decisions, in addition to a portion of the equity
Definition of 'Initial Public Offering - IPO'
The first sale of stock by a private company to the public. IPOs are often
issued by smaller, younger companies seeking the capital to expand, but
can also be done by large privately owned companies looking to become
publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), the
best offering price and the time to bring it to market .
The process by which an underwriter attempts to determine at what price to offer an IPO based
on demand from institutional investors.
compensation package.
That said, achieving synergy is easier said than done - it is not automatically
realized once two companies merge. Sure, there ought to be economies of
scale when two businesses are combined, but sometimes a merger does just
the opposite. In many cases, one and one add up to less than two.
Sadly, synergy opportunities may exist only in the minds of the corporate
leaders and the deal makers. Where there is no value to be created, the CEO
and investment bankers - who have much to gain from a successful M&A deal will try to create an image of enhanced value. The market, however, eventually
sees through this and penalizes the company by assigning it a discounted
share price. We'll talk more about why M&A may fail in a later section of this
tutorial.
Varieties of Mergers
From the perspective of business structures, there is a whole host of different
mergers. Here are a few types, distinguished by the relationship between the
two companies that are merging:
Acquisitions
As you can see, an acquisition may be only slightly different from a merger. In
fact, it may be different in name only. Like mergers, acquisitions are actions
through which companies seek economies of scale, efficiencies and enhanced
market visibility. Unlike all mergers, all acquisitions involve one firm purchasing
another - there is no exchange of stock or consolidation as a new company.
Acquisitions are often congenial, and all parties feel satisfied with the deal.
Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company
can buy another company with cash, stock or a combination of the two.
Another possibility, which is common in smaller deals, is for one company to
acquire all the assets of another company. Company X buys all of Company Y's
assets for cash, which means that Company Y will have only cash (and debt, if
they had debt before). Of course, Company Y becomes merely a shell and will
eventually liquidate or enter another area of business.
Another type of acquisition is a reverse merger, a deal that enables a private
company to get publicly-listed in a relatively short time period. A reverse
merger occurs when a private company that has strong prospects and is eager
to raise financing buys a publicly-listed shell company, usually one with no
business and limited assets. The private company reverse merges into the
public company, and together they become an entirely new public corporation
with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one
common goal: they are all meant to create synergy that makes the value of the
combined companies greater than the sum of the two parts. The success of a
merger or acquisition depends on whether this synergy is achieved.
bondholders who would like a solid performance from the company and,
therefore, a reduced risk of default
Definition of 'Privatization'
1. The transfer of ownership of property or businesses from a government to a privately owned
entity.
2. The transition from a publicly traded and owned company to a company which is privately
owned and no longer trades publicly on a stock exchange. When a publicly traded company
becomes private, investors can no longer purchase a stake in that company.
about profits.
2. Most companies start as private companies funded by a small group of investors. As
they grow in size, they will often access the equity market for financing or ownership
transfer through the sale of shares. In some cases, the process is subsequently reversed
when a group of investors or a private company purchases all of the shares in a public
company, making the company private and, therefore, removing it from the stock
market.
Definition of 'Exchange Rate'
US$1 = C$1.1050. Here the base currency is the US dollar and the
counter currency is the Canadian dollar. In Canada, this exchange
rate would comprise a direct quotation of the Canadian dollar. This is
easy to understand intuitively, since prices of goods and services in
Canada are expressed in Canadian dollars; therefore the price of a US
C$1 = US$ 0.9050 = 90.50 US cents. Here, since the base currency is
the Canadian dollar and the counter currency is the US dollar, this
would be an indirect quotation of the Canadian dollar in Canada.
US$1 = C$1.1050. Here the base currency is the US dollar and the
counter currency is the Canadian dollar. In Canada, this exchange
rate would comprise a direct quotation of the Canadian dollar. This is
easy to understand intuitively, since prices of goods and services in
Canada are expressed in Canadian dollars; therefore the price of a US
dollar in Canadian dollars is an example of a direct quotation for a
Canadian resident.
C$1 = US$ 0.9050 = 90.50 US cents. Here, since the base currency is
the Canadian dollar and the counter currency is the US dollar, this
would be an indirect quotation of the Canadian dollar in Canada.
For example, putting some assets in bonds and other assets in stocks can
mitigate systematic risk because an interest rate shift that makes bonds
less valuable will tend to make stocks more valuable, and vice versa, thus
limiting the overall change in the portfolios value from systematic changes.
Interest rate changes, inflation, recessions and wars all represent sources of
systematic risk because they affect the entire market. Systematic risk
underlies all other investment risks.
The Great Recession provides a prime example of systematic risk. Anyone
who was invested in the market in 2008 saw the values of their
investments change because of this market-wide economic event,
regardless of what types of securities they held. The Great Recession
affected different asset classes in different ways, however, so investors with
broader asset allocations were impacted less than those who held nothing
but stocks.
If you want to know how much systematic risk a particular security, fund or
portfolio has, you can look at its beta, which measures how volatile that
investment is compared to the overall market. A beta of greater than 1
means the investment has more systematic risk than the market, less than
1 means less systematic risk than the market, and equal to one means the
same systematic risk as the market.
Whereas this type of risk affects a broad range of securities, unsystematic
risk affects a very specific group of securities or an individual security.
Unsystematic risk can be mitigated through diversification.
For example, the risk that airline industry employees will go on strike, and
airline stock prices will suffer as a result, is considered to be unsystematic
risk. This risk primarily affects the airline industry, airline companies and
the companies with whom the airlines do business. It does not affect the
entire market system, so it is an unsystematic or nonsystematic risk.
An investor who owned nothing but airline stocks would face a high level of
unsystematic risk. By diversifying his or her portfolio with unrelated
holdings, such as health-care stocks and retail stocks, the investor would
face less unsystematic risk. However, even a portfolio of well-diversified
assets cannot escape all risk. It will still be exposed to systematic risk,
which is the uncertainty that faces the market as a whole. Even staying out
of the market completely will not take an investors risk down to zero,
because he or she would still face risks such as losing money from inflation
and not having enough assets to retire.
Investors may be aware of some potential sources of unsystematic risk, but
it is impossible to be aware of all of them or to know whether or when they
might occur. An investor in health-care stocks may be aware that a major
shift in government regulations could affect the profitability of the
companies they are invested in, but they cannot know when new
regulations will go into effect, how the regulations might change over time
or how companies will respond.
per share (an independent variable) the company reports at the end of the
year and the company's price-to-earnings multiple (another independent
variable) at that time. The analyst can create a table of predicted price-toearnings multiples and a corresponding value of the company's equity
based on different values for each of the independent variables.
Simulation Analysis
A risk measurement technique based on ranges of historical price changes and/or
Monte Carlo methods. Typically, the position or portfolio is revalued at each price or set
of prices generated by the price generation mechanism. Either the largest absolute loss
or a conservative percentile of losses reflecting a confidence interval analysis is
selected as the appropriate measure of the worst case position or portfolio risk.
1. A bank certificate issued in more than one country for shares in a foreign
company. The shares are held by a foreign branch of an international bank.
The shares trade as domestic shares, but are offered for sale globally
through the various bank branches.
2. A financial instrument used by private markets to raise capital
denominated in either U.S. dollars or euros.
Investopedia explains 'Global Depositary Receipt - GDR'
The regulatory body for the investment market in India. The purpose of
this board is to maintain stable and efficient markets by creating and
enforcing regulations in the marketplace.
The Securities and Exchange Board of India is similar to the U.S. SEC. The
SEBI is relatively new (1992) but is a vital component in improving the
quality of the financial markets in India, both by attracting foreign
investors and protecting Indian investors.
Definition of 'Covenant'
A promise in an indenture, or any other formal debt agreement, that certain activities will or
will not be carried out. Covenants in finance most often relate to terms in a financial
contracting, such as loan documentation stating the limits at which the borrower can further
lend or other such stipulations. Covenants are put in place by lenders to protect themselves
from borrowers defaulting on their obligations due to financial actions detrimental to
themselves or the business.
Covenants are most often represented in terms of financial ratios which must be maintained for
businesses which lend, such as a maximum debt-to-asset ratio or other such ratios. Covenants
can cover everything from minimum dividend payments to levels that must be maintained in
working capital to key employees remaining with the firm. Once a covenant is broken, the
lender will typically have the right to call back the obligation from the borrower.
Definition of 'Inventory'
The raw materials, work-in-process goods and completely finished goods that are considered to be the
portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the
most important assets that most businesses possess, because the turnover of inventory represents one of
the primary sources of revenue generation and subsequent earnings for the company's
shareholders/owners.
where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)
The EOQ formula can be modified to determine production levels or order interval lengths, and is used
by large corporations around the world, especially those with large supply chains and high variable costs
per unit of production.
Despite the equation's relative simplicity by today's standards, it is still a core algorithm in the software
packages that are sold to the largest companies in the world.