What is Financial Risk

Financial risk is the possibility that shareholders or other financial stakeholders will lose money when they
invest in a company that has debt if the company's cash flow proves inadequate to meet its financial
obligations. When a company uses debt financing, its creditors are repaid before shareholders if the
company becomes insolvent.

What is Business Risk

Business risk is the possibility a company will have lower than anticipated profits or experience a loss rather
than taking a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price,
input costs, competition, the overall economic climate and government regulations. A company with a
higher business risk should choose a capital structure that has a lower debt ratioto ensure it can meet its
financial obligations at all times.

Operating income is an accounting figure that measures the amount of profit realized from a
business's operations, after deducting operating expenses such as wages, depreciation and cost of goods
sold (COGS). Operating income takes a company's gross income, which is equivalent to total revenue minus
COGS, and subtracts all operating expenses. A business's operating expenses are costs incurred from
normal operating activities and include items such as office supplies and utilities.

What is Operating Expense

An operating expense is an expense a business incurs through its normal business operations. Often
abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll,
insurance, and funds allocated for research and development. One of the typical responsibilities that
management must contend with is determining how to reduce operating expenses without significantly
affecting a firm's ability to compete with its competitors.

The IRS treats capital expenses differently than operating expenses. According to the IRS, operating
expenses must be ordinary (common and accepted in the business trade) and necessary (helpful and
appropriate in the business trade). In general, businesses are allowed to write off operating expenses for the
year in which the expenses were incurred; alternatively, businesses must capitalize capital expenses/costs.
For example, if a business spends $100,000 on payroll, it can write off the entirety of that expense the year it
is incurred, but if a business spends $100,000 buying a large piece of factory equipment or a vehicle, it must
capitalize the expense or write it off over time. The IRS has guidelines related to how businesses must
capitalize assets, and there are different classes for different types of assets.

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.

Financial risk is the risk to the stockholders that is caused by an increase in debt and preferred equities in a
company's capital structure. As a company increases debt and preferred equities, interest payments increase,
reducing EPS. As a result, risk to stockholder return is increased. A company should keep its optimal capital
structure in mind when making financing decisions to ensure any increases in debt and preferred equity
increase the value of the company
Times interest earned (TIE) is a metric used to measure a company's ability to meet its debt obligations. The
formula is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the
total interest payable on bonds and other contractual debt. TIE indicates how many times a company can
cover its interest charges on a pretax earnings basis.

Earnings per share (EPS) ratio measures how many dollars of net income have been earned by each share
of common stock. It is computed by dividing net income less preferred dividend by the number of shares of
common stock outstanding during the period. It is a popular measure of overall profitability of the company
and is usually expressed in dollars.

What is the Dividend Per Share - DPS

Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share
outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim
dividends, over a period of time by the number of outstanding ordinary shares issued. A company's DPS is
often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend
yield.

What is the {term}? Clientele Effect

The clientele effect is a theory that explains how a company's stock price will move according to the demands
and goals of investors in reaction to a tax, a dividend or another policy change. The clientele effect first assumes
that specific investors are attracted to different company policies and that when a company's policy changes,
investors will adjust their stock holdings accordingly. As a result of this adjustment, the stock price will move up
or down.

Two Sides of the Clientele Effect

The first side of the clientele effect describes the way in which certain investors – or clients – seek out stocks in
a specific category. Some investors, like Warren Buffett, try to only invest in stocks with a high dividend,
whereas other investors, such as technology investors, seek companies that are high-growth with the potential
for high capital gains. Thus, the clientele effect first outlines the way in which the company's maturity and
business operations initially attract a certain type of investor.

The second side of the clientele effect describes how current investors react when there are changes to a
company's policies and procedures. If, for example, a public technology stock pays no dividends and reinvests
all of its profits back into the company, it first attracts a growth investor. Then, if the company decides to stop
reinvesting in its growth and instead pay a dividend, high-growth investors may exit their positions and instead
seek other stocks with high-growth potential. Dividend-seeking income investors may now see the technology
company as an attractive investment. This explains the second meaning of the clientele effect, which has an
impact on the company's share price.

Consider a company that already pays a dividend and has attracted clientele whose investment goal is to obtain
stock with a high dividend payout. If the company then decides to decrease its dividend, dividend investors may
still sell their stock and invest in another company that pays a higher dividend. As a result, the company's share
price will decline.
A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the
liquidity of the shares. Although the number of shares outstanding increases by a specific multiple, the total
dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any
real value. The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or
three shares, respectively, for every share held earlier.

When a stock split is implemented, the price of shares adjust automatically in the markets. A company's board of
directors makes the decision to split the stock into any number of ways. For example, a stock split may be 2-for-
1, 3-for-1, 5-for-1, 10-for-1, 100-for-1, etc. A 3-for-1 stock split means that for every one share held by an
investor, there will now be three. In other words, the number of outstanding sharesin the market will triple. On
the other hand, the price per share after the 3-for-1 stock split will be reduced by dividing the price by 3. This
way, the company's overall value, measured by the market capitalization, would remain the same.

What is a Stock Dividend

A stock dividend is a dividend payment made in the form of additional shares rather than a cash payout.
Companies may decide to distribute this type of dividend to shareholders of record if the company's availability
of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per
existing share, such as if a company issued a stock dividend of 0.05 shares for each single share held by
existing shareholders.

Also known as a "scrip dividend," a stock dividend is a distribution of shares to existing shareholders in lieu of
a cash dividend. This type of dividend arises when a company wants to reward its investors but either doesn't
have the capital to distribute or it wants to hold onto its existing liquidity for other investments. Stock dividends
also have a tax advantage in that they aren't taxed until the shares are sold by an investor. This makes them
advantageous for shareholders who do not need immediate capital.

Repurcahase share

A share repurchase is a program by which a company buys back its own shares from the marketplace, usually
because management thinks the shares are undervalued, and thereby reducing the number of outstanding
shares. The company buys shares directly from the market or offers its shareholders the option of tendering their
shares directly to the company at a fixed price.

Reducing the number of shares means earnings per share (EPS), revenue and cash flow grow more quickly. If
the business pays out the same amount of total money to shareholders annually in dividends, and the total
number of shares decreases, each shareholder receives a larger annual dividend. If the corporation grows its
earnings and its total dividend payout, decreasing the total number of shares further increases the dividend
growth. Shareholders expect a corporation paying regular dividends will continue doing so.

Benefits of a Share Repurchase

A share repurchase shows the corporation believes its shares are undervalued and is an efficient method of
putting money back in shareholders’ pockets. The share repurchase reduces the number of existing shares,
making each worth a greater percentage of the corporation. The stock’s EPS increases while the price-earnings
ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors that the
business has sufficient cash set aside for emergencies and a low probability of economic troubles.

Drawbacks of a Share Repurchase

A share repurchase can give investors the impression that the corporation does not have other profitable
opportunities for growth, which is an issue for growth investors looking for revenue and profit increases. A
corporation is not obligated to repurchase shares due to changes in the marketplace or economy. Repurchasing
shares puts a business in a precarious situation if the economy takes a downturn or the corporation faces
financial issues it cannot cover.