Corporate Issuers

Question 1

Define:

Antidilutive

Answer 1

Transaction or security that would increase earnings per share or result in EPS higher than the company’s basic EPS, as opposed to reducing it (diluting it).

Antidilutive securities are not included in the calculation of diluted EPS.

Question 2

Define:

Basic EPS

Answer 2

Net earnings available to common shareholders.

(NI - pref dividends) / weighted avg common shares outstanding

Question 3

Define:

Cannibalization

Answer 3

When an investment or product takes customers and sales away from another product or part of the company.

Question 4

Define:

Capital budgeting

Answer 4

Allocating funds to long-range projects or investments.

Question 5

Define:

Capital expenditure

(CAPEX)

Answer 5

Spending/investing in physical capital (fixed assets).

Question 6

Define:

Capital stock

Answer 6

All buildings, machinery, and equipment used to produce goods and services.

Question 7

Define:

Capital structure

Answer 7

Mix of debt and equity which a company utilizes in order to finance its business.

Question 8

Define:

Competitive strategy

Answer 8

A company’s plan for responding to threats/opportunities presented by the external environment.

Question 9

Define:

Component cost of capital

Answer 9

Rate of return required by suppliers of different sources of capital (debt or equity) that a company uses to finance its operations and investments.

cost of debt capital or cost of equity capital

Question 10

Define:

Corporate governance

Answer 10

System of rules, practices, processes, and structures by which a company is directed, controlled, and operated.

Question 11

Define:

Cost of capital

Answer 11

Rate of return suppliers of capital require as compensation for their contribution of capital.

Question 12

Define:

Cost of debt

Answer 12

Cost of debt financing to a company (issuances of bonds or utilizing bank loans).

Question 13

Define:

Cost of preferred stock

Answer 13

The cost to a company of issuing preferred stock.

Dividend yield on preferred shares.

Question 14

Define:

Cost structure

Answer 14

Mix of a company’s costs (variable and fixed).

Question 15

Define:

Degree of financial leverage

(DFL)

Answer 15

Sensitivity of cash flows available to owners when operating income changes.

% Change NI / % Change EBIT

Question 16

Define:

Degree of total leverage

(DTL)

Answer 16

Sensitivity of cash flows to owners to changes in the number of units produced and sold.

% Change NI / % Change Units Sold

Question 17

Define:

Degree of operating leverage

(DOL)

Answer 17

Sensitivity of operating income to changes in units sold.

% Change EBIT / % Change Units Sold

Question 18

Define:

Diluted EPS

Answer 18

EPS if all dilutive securities were converted into common shares.

Question 19

Define:

Diluted shares

Answer 19

Number of shares that would be outstanding if all potentially dilutive securities were exercised.

convertible debt, convertible preferred stock, employee stock options

Question 20

Define:

Equity risk premium

Answer 20

Premium investors require in order to invest in equities.

E(return on equities) - risk free rate

Question 21

Define:

Ex-dividend date

Answer 21

The first date a share trades without the dividend.

Question 22

Define:

Financing activities

Answer 22

Activities related to obtaining/repaying capital used in the business.

Question 23

Define:

Impact investing

Answer 23

Investing with the goal of achieving social or environmental objectives (+ good returns) by engaging with, or direct investment in, a company or project.

Question 24

Define:

Negative screening

Answer 24

Excluding certain sectors or companies, which do not align with an investor’s accepted standards, from investment consideration.

ESG implementation

Question 25

# Define: Principal–agent relationship

Answer 25

A relationship in which a principal hires an **agent to perform a particular task or service on their behalf.**

Question 26

# Define: Positive screening

Answer 26

Identifying companies that **embrace desired ESG-related principles.** ## Footnote ESG implementation

Question 27

# Define: Project sequencing

Answer 27

When projects occur at different points in time (sequenced), so that investing in a project creates the option to invest in future projects. ## Footnote Projects may need to be deferred until current projects are resolved.

Question 28

# Define: Proxy contest

Answer 28

Corporate takeover mechanism: a group seeking a controlling position on a company’s board of directors attempts to persuade shareholders to vote for them.

Question 29

# Define: Stakeholders

Answer 29

Individuals or groups likely affected (either directly or indirectly) by a decision.

Question 30

# Define: Target capital structure

Answer 30

A company’s ***desired*** proportions of debt and equity financing.

Question 31

# Define: Tender offer

Answer 31

Corporate takeover mechanism: **shareholders are solicited to sell their interests** directly to the group seeking to gain control.

Question 32

# Define: Vote by proxy

Answer 32

A mechanism that allows a designated party to vote on the shareholder’s behalf.

Question 33

# Define: Weighted average cost of capital | (WACC)

Answer 33

A weighted average of the required rates of return (after-tax) on a company’s common stock, preferred stock, and long-term debt. ## Footnote Weight determined by % of target capital structure component constitutes.

Question 34

# Define: Working capital

Answer 34

current assets - current liabilities

Question 35

# Define: Working capital management

Answer 35

A company’s management of short-term assets and liabilities.

Question 36

# Define: Abandonment Option

Answer 36

Option to terminate an investment at a future time if the financial results are disappointing.

Question 37

# Define: Accredited Investors

Answer 37

Individuals considered sophisticated enough to take greater risk. ## Footnote *less need for regulatory oversight*

Question 38

# Define: Affiliate Marketing

Answer 38

When a company generates revenues via sales made on websites other than its own.

Question 39

# Define: Agency Costs

Answer 39

Costs due to conflicts of interest between principals and agents. ## Footnote Agent is instituted to represent the principal, but may have own interests which conflict and create costs for the principal.

Question 40

# Define: Aggregators

Answer 40

A market where products and services are redistributed under their own brand.

Question 41

# Define: Bundling

Answer 41

Pricing approach: combining products/services so that customers buy more than they likely would have otherwise (more likely to buy them together).

Question 42

# Define: Cost of equity

Answer 42

Return required by equity investors.

Question 43

# Define: Crowdsourcing

Answer 43

Business model which uses contributions made from users.

Question 44

# Define: Debt tax shield

Answer 44

Tax paid on debt is tax deductible (**reduces taxable income**).

Question 45

# Define: Disruption

Answer 45

New competitors taking market share from established companies. ## Footnote May be due to new tech or business model.

Question 46

# Define: Direct sales ## Footnote aka direct to consumer sales

Answer 46

Selling directly to end consumer. ## Footnote Not using a distributor.

Question 47

# Define: Drop shipping

Answer 47

Goods are delivered directly to customer from manufacturer.

Question 48

# Define: Dynamic pricing

Answer 48

Ability to charge **different prices at different times**. ## Footnote surge pricing

Question 49

# Define: Engagement/active ownership

Answer 49

Using shareholder power to influence corporate decision making. ## Footnote ESG approach shareholder proposals, proxy voting

Question 50

# Define: Execution risk

Answer 50

Risk that **management will fail to do what was promised** (fail to deliver expected results).

Question 51

# Define: Franchising

Answer 51

Third party operator granted permission to **use an asset/intellectual property in exchange for royalty compensation**.

Question 52

# Define: Fungible

Answer 52

interchangeable

Question 53

# Define: Green finance

Answer 53

Financing for economic growth while also giving consideration to addressing environmental issues.

Question 54

# Define: Green bonds

Answer 54

Bonds **used to finance environmental products/projects.**

Question 55

# Define: Hidden revenue business model

Answer 55

Providing services for free, but generating revenue elsewhere. ## Footnote Like advertisements on some video streaming services.

Question 56

# Define: Licensing arrangement

Answer 56

Right to produce a product or use intangible assets in return for a royalty.

Question 57

# Define: Marketplace business

Answer 57

Business which **creates networks** of buyers and sellers. ## Footnote Doesn't take any ownership of goods.

Question 58

# Define: Omnichannel

Answer 58

Distribution strategy utilizing both digital and physical sales channels.

Question 59

# Define: Optimal capital structure

Answer 59

Capital structure that maximizes value of company.

Question 60

# Define: Optional product pricing

Answer 60

Pricing approach which is applied if customer buys additional services or features.

Question 61

# Define: Pay-in-advance

Answer 61

Business model requiring payment before product or service is delivered. ## Footnote Reduces the need for working capital.

Question 62

# Define: Pecking order theory

Answer 62

If managers consider how actions will be perceived by outsiders when considering how to finance, sources which are less visible to outsiders (internally generated funds) are more desirable. ## Footnote Equity is less desirable.

Question 63

# Define: Penetration pricing

Answer 63

Discount pricing to **build scale and secure market share**.

Question 64

# Define: Pet projects

Answer 64

Investments because manager uses their influence (typically not subjected to usual capital allocation analysis).

Question 65

# Define: Price discrimination

Answer 65

Charging **different prices to different customers** based on willingness to pay.

Question 66

# Define: Price setting option

Answer 66

Adjusting prices when demand varies from forecast.

Question 67

# Define: Product market risk

Answer 67

Risk the market for a new product/service is less than expected.

Question 68

# Define: Production-flexibility option

Answer 68

Adjusting production when demands varies from forecast.

Question 69

# Define: Subscription Pricing

Answer 69

Customers essentially "rent" a product or service. ## Footnote Generate recurring revenue.

Question 70

# Define: Socially responsible investing

Answer 70

Choosing investments which **align with investor's social, moral, or faith-based beliefs.**

Question 71

# Define: Special purpose acquisition company | (SPAC)

Answer 71

**Publicly listed** shell company **used to acquire** an unspecified private company at a point in the future.

Question 72

# Define: Static trade off theory of capital structure

Answer 72

Optimal level of debt is the point where additional debt causes *costs of financial distress* to increase **more than the benefit of the additional tax shield**.

Question 73

# Define: Tiered pricing

Answer 73

Charging different prices to different buyers (often based on volume).

Question 74

# Define: Uncommitted lines of credit

Answer 74

Least reliable form of bank borrowing. Bank offers a line of credit for an extended period of time, while retaining the right to refuse different uses of the LOC.

Question 75

# Define: Value added resellers

Answer 75

Business which distribute a product but **provide value by handling more complex aspects** of installation, customization, servicing, or support.

Question 76

# Define: Value based pricing

Answer 76

Pricing based upon the value of the product or service to the specific customer.

Question 77

# Define: Value chain

Answer 77

Systems/processes of a firm which create value for customers.