Understanding Leases, Stocks, and Financial Analysis

Leases

• Operating lease: a shorter-term lease under which the lessor is responsible for insurance, taxes, and upkeep, cancelable by lessee on short notice.
• Financial lease: a longer-term, fully amortized lease which the lessee is responsible for maintenance, taxes, and insurance. Not cancelable without penalty.
• Leveraged lease: a tax-oriented lease in which the lessor borrows a substantial portion of the purchase price of the leased asset on a nonrecourse basis.
• Sale and leaseback: occurs when a company sells an asset it owns to another party and simultaneously leases it back.
• Capital lease: transfer ownership to lessee by the end of the term, lesses purchase the asset at a price below fair market value when lease expires, >75% economic life, PV of the lease payments is 90% of the fair market value.

Stocks

• Common stock: Equity without priority for dividends or in bankruptcy.
• Cumulative voting: a procedure in which a shareholder may cast all votes for one member of the board of directors.
• Straight voting: A procedure in which a shareholder may cast all votes for each member of the board of directors.
• Preferred stock: stock with dividend priority over common stock, normally with a fixed dividend rate, without voting rights.

Financial Analysis

• Capital asset pricing model: E(Ri) = Rf + [E(RM) - Rf]* Beta i
• NPV: the difference between an investment's market value and its cost.
• AAR: an investment's average net income divided by its average book value.
• IRR: the discount rate that makes the NPV of an investment zero.
• Profitability index: the present value of an investment's future cash flows divided by its initial cost.
• Scenario analysis: the determination of what happens to NPV estimates when we ask what-if questions.
• Sensitivity analysis: investigation of what happens to NPV when only one variable is changed.

Foreign Bonds and Mergers

• American depositary Receipt: A security issued in the US representing shares of a foreign stock and allowing the stock to be traded in the US.
• Merger: the complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity.
• Consolidation: a merger in which an entirely new firm is created and both the acquired and the acquiring firms cease to exist.
• Horizontal: in the same industry as the bidder. Vertical: firms at different steps of the production process.
• Going-private: transactions in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group.
• Leverage buyouts: transactions in which a large percentage of the money used to buy the stock is borrowed.