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Accrual Basis: Under the accrual basis of accounting, expenses are matched with the related
revenues and/or are reported when the expense occurs, not when the cash is paid. The result of
accrual accounting is an income statement that better measures the profitability of a company
during a specific time period.
2. Agency Cost: Agency costs are 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.
3. Annuity: An annuity is a contractual financial product sold by financial institutions that is
designed to accept and grow funds from an individual and then, upon annuitization, pay out a
stream of payments to the individual at a later point in time. The period of time when an annuity
is being funded and before payouts begin is referred to as the accumulation phase. Once
payments commence, the contract is in the annuitization phase.
4. Bid Price: A bid price is the price a buyer is willing to pay for a security. This is one part of
the bid with the other being the bid size, which details the amount of shares the investor is
willing to purchase at the bid price. The opposite of the bid is the ask price, which is the price a
seller is looking to get for his or her shares.
5. Bond: A bond is a debt investment in which an investor loans money to an entity (typically
corporate or governmental) which borrows the funds for a defined period of time at a variable or
fixed interest rate. Bonds are used by companies, municipalities, states and sovereign
governments to raise money and finance a variety of projects and activities. Owners of bonds are
debtholders, or creditors, of the issuer.
6. Bond Indenture: An indenture is a legal and binding contract between a bond issuer and the
bondholders. The indenture specifies all the important features of a bond, such as its maturity
date, timing of interest payments, method of interest calculation, callable/convertible features if
applicable and so on. The indenture also contains all the terms and conditions applicable to the

bond issue. Other critical information included in the indenture are the financial covenants that
govern the issuer and the formulas for calculating whether the issuer is within the covenants.
7. Book Value: Book value refers to the total amount a company would be worth if it liquidated
its assets and paid back all its liabilities. Book value can also represent the value of a particular
asset on the company's balance sheet after taking accumulated depreciation into account.

8. Capital Structure: A capital structure is a mix of a company's long-term debt, specific shortterm debt, common equity and preferred equity. The capital structure is how a firm finances its
overall operations and growth by using different sources of funds. Debt comes in the form of
bond issues or long-term notes payable, while equity is classified as common stock, preferred
stock or retained earnings. Short-term debt such as working capital requirements is also
considered to be part of the capital structure.
9. Common Stock: A common stock is a security that represents ownership in a corporation.
Holders of common stock exercise control by electing a board of directors and voting on
corporate policy. Common stockholders are on the bottom of the priority ladder for ownership
structure. In the event of liquidation, common shareholders have rights to a company's assets
only after bondholders, preferred shareholders and other debtholders have been paid in full.
10. 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.
11. Debenture: A debenture is 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 to secure capital.
Like other types of bonds, debentures are documented in an indenture.
12. Diversifiable risk: Company- or industry-specific hazard that is inherent in each investment.
Unsystematic risk, also known as nonsystematic risk, "specific risk," "diversifiable risk" or
"residual risk," can be reduced through diversification. By owning stocks in different companies
and in different industries, as well as by owning other types of securities such as Treasuries and
municipal securities, investors will be less affected by an event or decision that has a strong
impact on one company, industry or investment type. Examples of unsystematic risk include a
new competitor, a regulatory change, a management change and a product recall.

13. Dividend payout ratio: The part of the earnings not paid to investors is left for investment to
provide for future earnings growth. Investors seeking high current income and limited capital
growth prefer companies with high Dividend payout ratio. However investors seeking capital
growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High
growth firms in early life generally have low or zero payout ratios. As they mature, they tend to
return more of the earnings back to investors. Note that dividend payout ratio is calculated as
DPS/EPS.
14. Financial leverage: Financial leverage is the degree to which a company uses fixed-income
securities such as debt and preferred equity. The more debt financing a company uses, the higher
its financial leverage. A high degree of financial leverage means high interest payments, which
negatively affect the company's bottom-line earnings per share.
15. Private placement: A private placement is the sale of securities to a relatively small number
of select investors as a way of raising capital. Investors involved in private placements are
usually large banks, mutual funds, insurance companies and pension funds. A private placement
is different from a public issue, in which securities are made available for sale on the open
market to any type of investor.
16. Money market securities: Money market securities are essentially IOUs issued by
governments, financial institutions and large corporations. These instruments are very liquid and
considered extraordinarily safe. Because they are extremely conservative, money market
securities offer significantly lower returns than most other securities.
17. Default risk: Default risk is the chance that companies or individuals will be unable to the
required payments on their debt obligations. Lenders and investors are exposed to default risk in
virtually all forms of credit extensions. To mitigate the impact of default risk, lenders often
charge rates of return that correspond the debtor's level of default risk. A higher level of risk
leads to a higher required return.
18. Case forecasting: