Financial Terms related to Equity This document is part of the valuable contents available at www.ftpall.com, a free online glossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor. EQUITY All equity rate • The discount rate that reflects only the business risks of a project and abstracts from the effects of financing. • The discount rate that reflects only the business risks of a project and abstracts from the effects of financing. Asset/equity ratio • The ratio of total assets to stockholder equity. Assets to equity • The ratio of assets to equity in the company; a measure of leverage, which has a bearing on the Profitability of the firm. Bottom up equity management style www.ftpall.com 2|Page • A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks. Common equity • The total investment made by the company's owners consisting of the value of common shares plus retained earnings. • The ownership of the company may be held by two classes of shareholders, preferred and common. The stock held by the second group is called the common equity of the company. Common equity is useful in measuring the performance of a Find thousands of financial terms at www.ftpall.com company's management. See also: Preferred Equity. Common equity ratio • Measures the proportion of total assets financed by common shareholders. Common stock/other equity • Value of outstanding common shares at par, plus accumulated retained earnings. Also called shareholders' equity. Cost of common equity • The rate at which investors discount the expected dividends of the firm to determine its share value: the required rate of return investors demand for holding the common shares of the company. Cost of equity • This is the price companies pay to raise equity capital. Denotes dividends and capital gains paid to the shareholders. In the context of valuing firms, if the capital is equity, then the cost of capital is called cost of equity. Debt equity ratio • Measures the ratio of long-term debt to common equity. Debt to equity ratio www.ftpall.com 3|Page • Refers to the capitalization relationship of securities. Here, it is the amount of bonds and preferred stocks relative to the corporate equity position. • The ratio identifies the relationship of debt to ownership interest in the firm's financial structure. A measure of a company's financial leverage, calculated by dividing Long Term Debt by Shareholders' Equity. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt, which can result in volatile earnings as a result of the additional interest expense. Find thousands of financial terms at www.ftpall.com Debt/equity ratio • Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity. Deferred equity • A common term for convertible bonds because of their equity component and the expectation that the bond will ultimately be converted into shares of common stock. Dual syndicate equity offering • An international equity placement where the offering is split into two tranches - domestic and foreign - and each tranche is handled by a separate lead manager. Earned on equity • See Return on Equity (ROE). Equity • Represents ownership interest in a firm. Also the residual dollar value of a futures trading account, assuming its liquidation at the going market price. • Ownership of stocks or real estate. • See Shareholders' Equity www.ftpall.com 4|Page Equity cap • An agreement in which one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated stock market benchmark is greater than a predetermined level. Equity capital • The long-term funds provided by the firm's owners, the shareholders. • see Owners' Equity Find thousands of financial terms at www.ftpall.com Equity claim • Also called a residual claim, a claim to a share of earnings after debt obligation have been satisfied. Equity collar • The simultaneous purchase of an equity floor and sale of an equity cap. Equity contribution agreement • An agreement to contribute equity to a project under certain specified conditions. Equity financing • Raising money for working capital or for capital expenditures by selling common or preferred stock to individual or institutional investors. In return for the money paid, the individuals or institutions receive ownership interests in the corporation. See also: Debt Financing. Equity floor • An agreement in which one party agrees to pay the other at specific time periods if a specific stock market benchmark is less than a predetermined level. Equity hedge funds • Try to long position themselves in stronger or outperform issues while selling short www.ftpall.com 5|Page weaker or poorer prospect securities. Variations of this are: trading large cap issues versus small caps; using derivatives for enhanced returns; specializing in program trading; or using leverage to magnify returns. Equity holders • Those holding shares of the firm's equity. Equity kicker • Used to refer to warrants because they are usually issued attached to privately Find thousands of financial terms at www.ftpall.com placed bonds. Equity linked policies • Related: Variable life Equity market • Related: Stock market Equity multiplier • Total assets divided by total common stockholders' equity; the amount of total assets per dollar of stockholders' equity. Equity options • Securities that give the holder the right to buy or sell a specified number of shares of stock, at a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock. Equity run • Is a statement generated every day which lists a customer's positions, equity, margin requirements, and prior day's activity. Point balances, cash balances, and value of marginable securities are other aspects which can be included. Equity swap www.ftpall.com 6|Page • A swap in which the cash flows that are exchanged are based on the total return on some stock market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap. Euroequity issues • Securities sold in the Euromarket. That is, securities initially sold to investors simultaneously in several national markets by an international syndicate. Euromarket. Related: external market Euroequity market Find thousands of financial terms at www.ftpall.com • The capital market around the world that deals in international equity issues; London has become the center of Euro-equity activity. Foreign equity market • That portion of the domestic equity market that represents issues floated by foreign companies. Gems growing equity mortgages • Mortgages in which annual increases in monthly payments are used to reduce outstanding principal and to shorten the term of the loan. International equity market • A vibrant equity market that emerged in the past 20 years to allow corporations to sell large blocks of shares in several different countries simultaneously. Investor's equity • The balance of a margin account. Related: buying on margin, initial margin requirement. Leveraged equity • Stock in a firm that relies on financial leverage. Holders of leveraged equity face the benefits and costs of using debt. www.ftpall.com 7|Page Long term debt to equity ratio • A capitalization ratio comparing long-term debt to shareholders' equity. Owner's equity • The book value of the business comprised of the owner's initial investment plus retained earnings, also the difference between total assets and total liabilities Percent retained to common equity • Also known as Plowback Ratio. A Value Line measurement defined as net profit Find thousands of financial terms at www.ftpall.com minus Common and Preferred Dividends, divided by Common Equity, expressed as a percentage. Preferred equity ratio • Measures the proportion of total assets financed by preferred shareholders. Preferred equity redemption stock • Abbreviated PERC. Preferred stock that converts automatically into equity at a stated date. A limit is placed on the value of the shares the investor receives. Return on equity • Abbreviated ROE. Measures the return earned on the owners' (both preferred and common shareholders') investment in the firm. • Abbreviated ROE. Also known as Earned on Equity. ROE tells how effectively company management is using the shareholders' money to make a profit. This is useful for comparisons among companies. A simple formula is Net Income divided by Shareholders' Equity. Generally, the higher the ROE, the more efficient the management and the better the return to shareholders. It is expected that there will be some variation in the ROE numbers over time. For example, issuing more shares increases shareholders' equity. This causes the return www.ftpall.com 8|Page on equity to decline until management can invest the new funds and generate new earnings. Another decline in the ROE trend can occur when a company relies heavily on debt. If interest expenses rise significantly, net income will likely be reduced. Therefore ROE will be less. Return on equity is a balancing act between careful use of debt and good use of assets. • Abbreviated ROE. Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result Find thousands of financial terms at www.ftpall.com is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity). Shareholders' equity • Also known as Equity and Net Worth. The term identifies shareholders' ownership interest in a company. Equity is useful in measuring the performance of a company's management (called Return on Equity, abbreviated ROE). The equity ownership of the company is usually held by two classes of shareholders Preferred and Common. It may include preferred and common shares, paid-in capital (capital surplus), Retained Earnings (earned surplus), and Treasury Stock. The accounting definition is: all assets on a balance sheet (including intangibles) minus all liabilities (current, non-current liabilities, and long-term debt. • This is a company's total assets minus total liabilities. A company's net worth is the same thing. Stockholder equity • Balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid in surplus, and retained earnings. Stockholders' equity www.ftpall.com 9|Page • See Shareholders' Equity. • The residual claims that stockholders have against a firm's assets, calculated by subtracting total liabilities from total assets. Stratified equity indexing • A method of constructing a replicating portfolio in which the stocks in the index are classified into stratum, and each stratum is represented in the portfolio. Swap equity Find thousands of financial terms at www.ftpall.com • The buyer of the swap agrees to make a number of payments periodically tied to return on some equity index (such as S&P 500 index) and receive fixed payments (such as T-Bill rate). By entering into a equity swap, both parties attempt to hedge their exposures to stock market. Top down equity management style • A management style that begins with an assessment of the overall economic environment and makes a general asset allocation decision regarding various sectors of the financial markets and various industries. The bottom-up manager, in contrast, selects the specific securities within the favored sectors. Total assets = total liabilities + shareholders' equity • This formula demonstrates the balance in the Balance Sheet. Total debt to equity ratio • A capitalization ratio comparing current liabilities plus long-term debt to shareholders' equity.