Thursday 27 August 2015

MBA Interview Q&A (Part-2)


Investor Words


Structured Finance : A service offered by many large financial institutions for

companies with very unique financing needs. These financing needs usually don't

match conventional financial products such as a loan. Structured finance generally

involves highly complex financial transactions.

Working Capital : A company's current assets minus its current liabilities -

considered a good measure of both a company's efficiency and its financial health. A

positive working capital means that the company is able to payoff their short-term

liabilities. A negative working capital means that a company currently is unable to

meet their short-term liabilities with their current assets (cash, accounts receivable,

inventory).

Also known as "net working capital".

Trade Working Capital : The difference between current assets and current liabilities

directly associated with everyday business operations.

Vendor Financing : The lending of money by a company to one of its customers so

that the customer can buy products from it. By doing this, the company increases its

sales even though it is basically buying its own products.

Waiver : The voluntary action of a person or party that removes that person's or

party's right or particular ability in an agreement. The waiver can either be in written

form or some form of action. A waiver essentially removes a real or potential liability

for the other party in the agreement.

Bull Market : A financial market of a certain group of securities in which prices

are rising or are expected to rise. The term "bull market" is most often used in respect

to the stock market, but really can be applied to anything that is traded, such as bonds,

currencies, commodities, etc.

Bull  markets are characterized by optimism, investor confidence and expectations

that strong results will continue. Of course, no bull market can last forever, and

sooner or later a bear market (in which prices fall) will come. It's tough if not

impossible to predict consistently when the trends in the market will change. Part of

the difficulty is that psychological effects and speculation can sometimes play a large

(if not dominant) role in the markets. The extreme on the high end is a stock-market

bubble, and on the low end a crash.

Bull : An investor who thinks the market, a specific security or an industry will rise.

Accounting Rate of Return – ARR : ARR provides a quick estimate of a project's

worth over its useful life. ARR is derived by finding profits before taxes and interest.

Accounts Payable Turnover Ratio : A short-term liquidity measure used to quantify

the rate at which a company pays off its suppliers. Accounts payable turnover ratio is

calculated by taking the total purchases made from suppliers and dividing it by the

average accounts payable amount during the same period.

Accounts Receivable – AR : Money owed by customers (individuals or

corporations) to another entity in exchange for goods or services that have been

delivered or used but not yet paid for. Accounts receivable usually come in the form

of operating lines of credit and are usually due within a relatively short time period,

ranging from a few days or weeks to a year.

Accrued Expense : An accounting expense recognized in the books before it is paid

for. It is a liability, usually current. These expenses are typically periodic and

documented upon a company's balance sheet due to the high probability of collection.

Accrued Interest : The interest that has accumulated on a bond since the last interest

payment up to but not including the settlement date.

There are two methods for calculating accrued interest:

1) 360-day year method, used for corporate and municipal bonds.

2) 365-day year method, used for government bonds.

Acid-Test Ratio

A stringent test that indicates if a firm has enough short-term assets to cover its

immediate liabilities without selling inventory. The acid-test ratio is far more

strenuous than the working capital ratio, primarily because the working capital ratio

allows for the inclusion of inventory assets.

Calculated by:



Acquisition: When one company purchases a majority interest in the acquired.

American Depository Receipt – ADR : A negotiable certificate issued by a U.S. bank

representing a specified number of shares (or one share) in a foreign stock that is

traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the

underlying security held by a U.S. financial institution overseas, and help to reduce

administration and duty costs on each transaction that would otherwise be levied.

American Depository Share - ADS

A share issued under deposit agreement that represents an underlying security

in the issuer's home country.

Amortization : 1. The paying off of debt in regular installments over a period of time.

2. The deduction of capital expenses over a specific period of time. Similar to

depreciation, it is a method of measuring the consumption of the value of long-term

assets like equipment or buildings.

Annual General Meeting – AGM : A mandatory yearly meeting of shareholders that

allows stakeholders to stay informed and involved with company decisions and

workings.

Arbitrage

The simultaneous purchase and selling of an asset in order to profit from a

differential in the price. This usually takes place on different exchanges or

marketplaces. Also known as a "riskless profit".

Articles of Incorporation : A set of documents filed with a government body for the

purpose of legally documenting the creation of a corporation. Also referred to as the

"corporate charter."

Auditor's Report : Recorded in the annual report, the auditor's report tests to see that

a corporation's financial statements comply with GAAP. This is sometimes referred to

as the clean opinion.

Average Annual Return – AAR : A figure used when reporting the historical return

of a mutual fund. The AAR is stated after expenses have been tallied, including

administration fees, 12b-1 fees, and others

Back Door Listing : A strategy of going public used by a company that fails to meet

the criteria for listing on a stock exchange. To get onto the exchange, the company

desiring to go public acquires an already listed company.

Business Risk : The risk that a company will not have adequate cash flow to meet its

operating expenses.

Bid :  1. An offer made by an investor, a trader or a dealer to buy a security. The bid

will stipulate both the price at which the buyer is willing to purchase the security and

the quantity to be purchased.

2. The price at which a market maker is willing to buy a security. The market maker

will also display an ask price, or the amount and price at which it is willing to sell.

 

 This is the opposite of the ask, which stipulates the price a seller is willing to accept

for a security and the quantity of the security to be sold at that price.

1. An example of a bid in the market would be $23.53 x 1,000, which means that an

investor is willing to purchase 1,000 shares at the price of $23.53. If a seller in the

market is willing to sell that amount for that price, then the transaction is completed.

2. Market makers are vital to the efficiency and liquidity of the marketplace. By

quoting both bid and ask prices on the market, they always allow investors to buy or

sell a security if they need to.

Board of Directors - B of D :  A group of individuals who are elected by stockholders

to establish corporate management policies and make decisions on major company

issues, such as dividend policies.



 These are the people who make decisions on your behalf for the company you invest

in.

Every pub Bond Rating :  A specification of a bond issuer's probability of defaulting

based on an analysis of the issuer's financial condition and profit potential.

Bond rating services are provided by Standard & Poor's, Moody's Investors Service,

and Fitch Investors Service.

Bond ratings start at AAA (denoting the highest investment quality) and usually end

at D (meaning payment is in default).  lic company must have a board of directors.

Break-Even Point - BEP :  1. In general, the point at which gains equal losses.

2. In options, the market price that a stock must reach for option buyers to avoid a loss

if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is

the strike price minus the premium paid.

    For businesses, reaching the break-even point is the first major step towards

profitability

Call Option :  An agreement that gives an investor the right (but not the obligation) to

buy a stock, bond, commodity, or other instrument at a specified price within a

specific time period

Capital Adequacy Ratio (CAR) :  A measure of a bank's capital. It is expressed as a

percentage of a bank's risk weighted credit exposures.

 

 This ratio is used to protect depositors and promote the stability and efficiency of

financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a

bank being required to cease trading, and tier two capital, which can absorb losses in

the event of a winding-up and so provides a lesser degree of protection to depositors.

Capital Budgeting :  The process of determining whether or not projects such as

building a new plant or investing in a long-term venture are worthwhile. Popular

methods of capital budgeting include net present value (NPV), internal rate of return

(IRR), discounted cash flow (DCF), and payback period.

Also known as investment appraisal.

Capital Loss :  The loss incurred when a capital asset (investment or real estate)

decreases in value. This loss is not realized until the asset is sold for a price that is

lower than the original purchase price.

 

 A capital loss is essentially the difference between the purchase price and the price at

which the asset is sold, where the sale price is lower then the purchase price.

For example, if an investor bought a house for $250,000 and five years later

sells the house for $200,000. The investor would realize a capital loss of

$50,000.

Capital Markets :  Markets where capital, such as stocks and bonds, are traded.

 

 Capital markets are used by companies to raise additional funds.

Capitalization :  1. In accounting, it is where costs to acquire an asset are included in

the price of the asset.

2. The sum of a corporation's stock, long-term debt and retained earnings. Also known

as "invested capital".

3. A company's outstanding shares multiplied by its share price, better known as

"market capitalization".

Capitalization Rate :  According to the Appraisal Institute, it is a method used to

convert an estimate of a single year's income expectancy into an indication of value in

one direct step, by dividing the income estimate by an appropriate rate.

 

 Also known as the cap rate. The relationship between Cap Rate (R), Income (I), and

Estimated Value (V) is as follows:

V = I / R

I = V x R

R = I / V

Cash Earnings Per Share - Cash EPS :  A ratio derived from operating cash flow

divided by diluted shares outstanding.



 Sometimes you may see cash EPS defined as either EPS plus amortization of

goodwill and other intangible items or net income plus depreciation divided by

outstanding shares.

Whatever the definition, the point of cash EPS is to be a stricter number than other

flavors of EPS because cash flow cannot be manipulated as easily as net income can.

Cash Flow Statement :  One of the quarterly financial reports any publicly traded

company is required to disclose to the SEC and the public. The document provides

aggregate data regarding all cash inflows a company receives from both its ongoing

operations and external investment sources, as well as all cash outflows that pay for

business activities and investments during a given quarter.

 

 Because public companies tend to use accrual accounting, the income statements they

release each quarter may not necessarily reflect changes in their cash positions. For

example, if a company lands a major contract, this contract would be recognized as

revenue (and therefore income), but the company may not yet actually receive the

cash from the contract until a later date. While the company may be earning a profit in

the eyes of accountants (and paying income taxes on it), the company may, during the

quarter, actually end up with less cash than when it started the quarter. Even profitable

companies can fail to adequately manage their cash flow, which is why the cash flow

statement is important: it helps investors see if a company is having trouble with cash.

Chapter 10 :  Named after the U.S. bankruptcy code 10, chapter 10 discusses how a

company can file for court protection.

 

 Under Chapter 10 provisions a company is subjected to reorganization.

Chapter 11 :  Named after the U.S. bankruptcy code 11, chapter 11 is a form of

bankruptcy that involves a reorganization of a debtor's business affairs and assets. It is

generally filed by corporations which require time to restructure their debts.

Chapter 11 gives the debtor a fresh start, subject to the debtor's fulfillment of its

obligations under its plan of reorganization.

 

 A Chapter 11 reorganization is the most complex of all bankruptcy cases and

generally the most expensive. It should be considered only after careful analysis and

exploration of all other alternatives.

Chapter 7 :  A bankruptcy proceeding where a company stops all operations and goes

completely out of business. A trustee is appointed to liquidate (sell) the company's

assets, and the money is used to pay off debt.

 

 The investors who take the least risk are paid first. For example, secured creditors

take less risk because the credit that they extend is usually backed by collateral, such

as a mortgage or other asset of the company. Next in line are the unsecured creditors,

and then the investors. We call this phenomenon "absolute priority."

Generally Accepted Accounting Principles - GAAP :  The common set of accounting

principles, standards and procedures that companies use to compile their financial

statements. GAAP is a combination of authoritative standards (set by policy boards)

and simply the commonly accepted ways of recording and reporting accounting

information.

Portfolio management : The process of managing the assets of a mutual fund,

including choosing and monitoring appropriate investments and allocating funds

accordingly.

Mutual fund: An open-ended fund operated by an investment company which raises

money from shareholders and invests in a group of assets, in accordance with a stated

set of objectives. Mutual funds raise money by selling shares of the fund to the public,

much like any other type of company can sell stock in itself to the public.

Price/earnings ratio: The most common measure of how expensive a stock is. The

P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings

over a 12-month period, usually the trailing period but occasionally the current or

forward period. The value is the same whether the calculation is done for the whole

company or on a per-share basis.

Poison pill: Any tactic by a company designed to avoid a hostile takeover. One

example is the issuance of preferred stock that gives shareholders the right to redeem

their shares at a premium after the takeover.

Debt/equity ratio: A measure of a company's financial leverage. Debt/equity ratio is

equal to long-term debt divided by common shareholders' equity. Typically the data

from the prior fiscal year is used in the calculation. Investing in a company with a

higher debt/equity ratio may be riskier, especially in times of rising interest rates, due

to the additional interest that has to be paid out for the debt.

Diluted earnings per share: Earnings per share, including common stock, preferred

stock, unexercised stock options, unexercised warrants, and some convertible debt. In

companies with a large amount of convertibles, warrants and stock options, diluted

earnings per share are usually a more accurate measure of the company's real earning

power than earnings per share.

Spin-off: An independent company created from an existing part of another company

through a divestiture, such as a sale or distribution of new shares.

Bridge financing: Financing extended to a person, company, or other entity, using

existing assets as collateral in order to acquire new assets. Bridge financing is usually

short-term.

Puttable Common Stock: Common stock that gives investors the option to put the

stock back to the company at a predetermined price.



 With puttable common stock, investors have the option of selling their shares back to

the issuer at a predetermined price. Typically, this price is relatively low, so the

option to put acts merely as a type of insurance for investors, sweetening the security.

Seed Capital:  The initial equity capital used to start a new venture or business.

 This initial amount is usually quite small because the venture is still in the idea or

conceptual stage. Also, there's a high risk that the venture will fail.

Balanced Fund: A mutual fund that invests its assets into the money market, bonds,

preferred stock, and common stock with the intention to provide both growth and

income. Also known as an asset allocation fund.

A balanced fund is geared towards investors looking for a mixture of safety, income,

and capital appreciation. The amount the mutual fund invests into each asset class

usually must remain within a set minimum and maximum.



Underwriter: A company or other entity that administers the public issuance and

distribution of securities from a corporation or other issuing body. An underwriter

works closely with the issuing body to determine the offering price of the securities

buys them from the issuer and sells them to investors via the underwriter's distribution

network.

Underwriters generally receive underwriting fees from their issuing clients, but they

also usually earn profits when selling the underwritten shares to investors. However,

underwriters assume the responsibility of distributing a securities issue to the public.

If they can't sell all of the securities at the specified offering price, they may be forced

to sell the securities for less than they paid for them, or retain the securities

themselves.

Gross Domestic Product – GDP:  The monetary value of all the goods and services

produced by an economy over a specified period. It includes consumption,

government purchases, investments, and exports minus imports.

   This is perhaps the best indicator of the economic health of a country. It is usually

measured annually; although, monthly stats are also released.

Factor:  A financial intermediary that purchases receivables from companies.

2. In terms of mortgages, the ratio of principal outstanding to the original balance.

The sale of accounts receivables is called factoring.

Code sharing: Code sharing is a business term which first originated in the airline

industry. It refers to a practice where a flight operated by an airline is jointly marketed

as a flight for one or more other airlines. Most if not all major airlines nowadays have

code sharing partnerships with other airlines, and code sharing is a key feature of the

major airline alliances.

Going Concern: A term for a company that has the resources needed in order to

continue to operate. If a company is not a going concern, it means the company has

gone bankrupt.

Investopedia Says: In other words, this refers to a company's ability to make enough

money to stay afloat. For example, many dotcoms are no longer a going concern.

Liquidation: When a business or firm is terminated or bankrupt, its assets are sold

and the proceeds pay creditors. Any leftovers are distributed to shareholders.

2. Any transaction that offsets or closes out a long or short position.

Investopedia Says: Creditors liquidate assets to try and get as much of the money

owed to them as possible. They have first priority to whatever is sold off. After

creditors are paid, the shareholders get whatever is left with preferred shareholders

having preference over common shareholders.

Lockup period: An interval during which an investment may not be sold. In the case

of an IPO, employees may not sell their shares for a period time determined by the

underwriter and usually lasting 180 days.

Rights issue: In equities, a rights issue can be made when a company wants to issue

new shares. The company gives existing shareholders the right to purchase new shares

in proportion to their existing holding, so as to avoid dilution. Shares are usually

offered at a discount, and most investors take up the offer of a rights issue.

Depletion: The reduction of the value of the assets of a company engaged in

removing natural resources (as by mining) because of the decrease over time of the

natural resources (as coal) available in or on the land being worked

The Calendar effect : The Calendar effect describes the tendency of stocks to

perform differently at different times, including performance anomalies like the

January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.

While certainly not an indicator that should be relied upon as the primary source for

trading, systems like our Options Trading System often do consider such effects when

determining whether to hold a position into a long weekend, through an options

expiration period, etc.

No comments:

Post a Comment