Financial Terms related to Equity

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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

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• 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

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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

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• 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.

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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

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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

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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
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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

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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
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• 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

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• 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.
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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

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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
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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

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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
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• 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

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• 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.