Stock Valuation

Preferred Stock Preferred stock is somewhat like a bond. They pay the same equal dividends forever.
Common Stock Common stock represents ownership in the company. Sometimes there are dividends, sometimes not.


What is the value of Preferred Stock?

This is easy. Preferred stock is basically a perpetuity.

What is the value of Common Stock?

This is not easy. This is a mess. Think about it. What is the value of a share of stock in a specific company? In one sense it is the price the stock trades at. Both the buyer and seller agree to exchange the stock at that price.

We assume that they are both rational people and both know something about the company and its future plans and profit potential. So, yes, that is one method: check the price of the stock in the paper or on the internet. But that's pretty darn easy. It's not really finance. It's more like reading. And I don't know if you realize this or not, but they don't give Nobel Prizes for reading. So there are other ways of doing stock valuation too.


The Gordon Growth Formula, also known as The Constant Growth Formula assumes that a company grows at a constant rate forever. This, by the way, is impossible. I mean, it can't grow forever. You know, if a company doubles in size every 5 years, pretty soon every single person in the world is their customer and then they can't grow at that rate anymore. (because the world population isn't doubling ever 5 years).

BUT, if we go ahead and assume that a company has a constant growth rate, we can use the following formula to get its value.

Constant Growth Formula Po = D 1 / ( Ks - G )

Po = Price
D1 = The next dividend. D1 = D0 (1 + G)
Ks = Rate of Return
G = Growth Rate
What is all this D1 and D0 stuff ?

D1 is the next dividend
D0 is the last dividend
Well we are assuming that the company has constant growth, right. So we take the last divided, multiply it by the growth rate and we can get the next dividend.

Example

Last years dividend = $ 1.00
Growth Rate = 5%
Rate of Return = 10%
First figure out D1.

D1 = D0 (1 + G)
D1 = $1.00 ( 1 + .05)
D1 = $1.00 (1.05)
D1 = $1.05
Next us the formula.

Po = D 1 / ( Ks - G )
Po = $1.05 / (10% - 5%)
Po = $1.05 / 5%
Po = $21.00
So, if we want to get a 10% rate of return on our money, and we assume that the company will grow forever at 5% per year, then we would be willing to pay $21.00 for this stock.

Bond Valuation

Bond When a company (or government) borrows money from the public or banks (bondholders) and agrees to pay it back later
Par Value The amount of money that the company borrows. Usually it is $1,000.
Coupon Payments This is like interest. The company makes regular payments to the bondholders, like every 6 months or every year.
Indenture The legal stuff. A written agreement between the company and the bond holder. They talk about how much the coupon payments will be, and when the money (par value) will be paid back to the bondholder.
Maturity Date Date when the company pays the par value back to the bondholder.
Market Interest Rate This changes everyday.

The thing about bonds is that the interest rate (coupon payments) is fixed. It doesn't change. And bonds last a long time. Like 10 years or whatever. So in the meantime, the market interest rate (the interest rates in general) go up and down. OK, well, if the coupon payments are for 10% and then the market interest rates fall from 10% to 8%, then that bond at 10% is valuable, right. It is paying 10% while the overall interest rate is only 8%. Exactly how much is it worth? You mean 'what is the present value of a bond?'

The Present Value of a Bond = The Present Value of the Coupon Payments (an annuity) + The Present Value of the Par Value (time value of money)

Example

Par Value = $ 1,000
Maturity Date is in 5 years
Annual Coupon Payments of $100, which is 10%
Market Interest rate of 8%
The Present Value of the Coupon Payments (an annuity) = $399.27

The Present Value of the Par Value (time value of money) =$680.58

The Present Value of a Bond = $ 399.27 + $ 680.58 = $1,079.86

Kinds of Interest Rates

Let's say I give you a credit card and the interest rate on the card is 3% per month. What is the annual rate that you are actually charged?? 36%?? Well, no. It's actually 42.57%.

Nominal Rate Nominal means "in name only". This is sometimes called the quoted rate.
Periodic Rate The amount of interest you are charged each period, like every month.
Effective Annual Rate The rate that you actually get charged on an annual basis. Remember you are paying interest on interest.

In the example
The Nominal Rate is 36%.
The Periodic Rate is 3% (you are charged 3% interest on your balance every month)
The Effective Annual Rate is 42.57%
Nominal Rate = Periodic Rate X Number of Compounding Periods
Effective Annual Rate = (1+ i / m)m -1

m = the number of compounding periods
i = the nominal interest rate
O.K., so let's try the example again.

Effective Annual Rate = (1+ i / m)m -1
Effective Annual Rate = ( 1 + .36 / 12 )12 -1
Effective Annual Rate = (1.03)12 - 1
Effective Annual Rate = (1.4257) -1
Effective Annual Rate = .4257
Effective Annual Rate = 42.57 %

Perpetuities

Perpetuities - are equal payments made regularly, like every month or every year, that go on forever.

You are rich. (Yes, but are you really happy?) You want to start the YOUR NAME HERE Scholarship at your university. Every year, some student will receive a $1000 scholarship. You're paying for it. Even after you, your kids and your grandkids are dead, you are still paying for it. Forever.

The question is....How much money will it cost you. In today's dollars. What is the present value of this perpetuity. (Hint: starting now and going on forever and ever, you assume the interest rate at your bank is going to be 3%).
PV (of a perpetuity) = payment / interest rate


Every year the interest you earn is used to pay for the scholarship. The principal in your bank account doesn't really change year to year.

PV (of a perpetuity) = payment / interest rate
PV = $ 1000 / .03
PV = $ 33,333
So, you put $ 33,333 into the bank. Each year the money earns $1000 interest. That interest becomes the scholarship.

The Time Value of Money

Present Value How much you got now.
Future Value How much what you got now grows to when compounded at a given rate

I give you 100 dollars. You take it to the bank. They will give you 10% interest per year for 2 year.

The Present Value = $ 100
Future Value = $121.
FV= PV (1 + i )N

FV = Future Value
PV = Present Value
i = the interest rate per period
n= the number of compounding periods

Understanding Basic Finance Terms

If you are like many, you don't always understand what people are talking about when it comes to loans. Without understanding the basic terminology when it comes to loans you just aren't setting yourself up right to make an educated decision when it comes to applying for a loan. There are hundreds of terms; Below are some of the most important:

Assets

Assets can be described as anything that holds value. Assets can be all types of things from cars to houses. Assets can be used in helping to build credit. For example if you are applying for a house loan, you might use your car as an asset, to show that if you default on a payment, that you have assets to fall back upon such as your car.

Capital

Capital can be a bit of tricky term as it can be used in several different situations to do with finances. Capital can be described as the assets that are available for use towards creating further assets; it can also apply to the cash in reserve, savings, property, or goods.

Debt

Debt is amount of money or something of value that is borrowed from a person referred to as a debtor. Usually a debt that is borrowed will carry some type of penalty along with the payback such as an interest, or service.

Debt Consolidation

Debt Consolidation is replacing multiple loans with a single loan that is normally secured on property. This can often reduce your (the borrowers) monthly outgoing interest payments by paying only one loan which is secured on the property sometimes over a longer term. Because the loan is secured, the interest rate will generally be considerably lower.

Equity

Equity is the difference between the value of a product (for example a house) and the amount that is owed on it.

Liabilities

Liabilities refers to the sum of all outstanding debts in which a company or individual owes to it's debtors.

Principal

Principal is used to describe the amount of money that is borrowed without including any interest or additional fee's.

Term

Term refers to the length of a debt agreement. For example if you were to take out a loan for a house over 10 years. 10 years would be the term.

*Glossary of Financial Terms*

List of Terms Definition
Bonds
A certificate of debt issued to raise funds. Bonds typically pay a fixed rate of interest and are repayable at a fixed date.

Capital Budgeting
The process of managing capital assets and planning future expenditure on capital assets.

Capital Investments
Funds invested by a business in its capital assets that are anticipated to be used before being replaced. Capital investments are generally significant business expenses, requiring long-term planning and financing.

Current Assets
A balance sheet item, current assets are those items owned by the firm with the intention to generate profits or other assets that can be converted to cash within one year. It includes cash, account receivables, inventory, cash equivalents and other cash equivalents.

Convertible Loans
A loan with a provision allowing it to be converted to equity within a specific time frame.

Convertible Preference Shares
Preference equity shares issued by a business that include a provision allowing them to be converted to ordinary equity shares after a specific time frame.

Creditors or Accounts Payable
Suppliers the company owes money to, usually for services or goods supplied.

Creditors' Turnover Rate
A short-term liquidity measure used to quantify the rate at which a business pays off its suppliers.


Debt Financing Debtors or Accounts Receivable
The money that you borrow to finance a business. Customers who owe the company money, usually for services or goods supplied.

Debtors' Turnnover Rate
A short-term liquidity measure used to quantify the rate at which a business receives payment from customers.

Default Risk or Risk of Default
The risk of loss due to non-payment by the borrower.

EBITDA
The earnings before interest, taxes, depreciation and amortization. It is the net cash inflow from operating activities, before working capital requirements are taken into account.

EBITDA Margin
A measure of operating performance. It is calculated by dividing EBITDA by sales and is usually expressed as a percentage.


Equity Financing
The issuance of ordinary shares to raise money for a business.

Factoring
Selling the interest in the accounts receivable or invoices to a financial institution at a small discount. It is sometimes called "accounts receivable financing". Factoring helps a company speeds up its cash flow so that it can more readily pay its current obligations and grow.


Fixed Assets
Fixed assets are those long-term tangible assets that the business has acquired for use to earn income over more than one year. These assets normally must have a useful life over a few years and not expected to be converted to cash in the current financial year. Examples include, factory, warehouse, equipment, fixtures and etc.


Initial Public Offering (IPO)
The sale of a company's shares to the public on a stock exchange for the first time.


Interest Coverage Ratio
An indication of the ability of a business to cover interest expenses with its income. It is calculated by dividing income before interest and taxes by interest paid.


Letter of Credit
A written undertaking by a bank, given to a seller at the request and on the instruction of the buyer, to pay up, at sight or at a future date, up to a stated sum of money within a prescribed time limit.


Trust Receipt
A financing facility for imports where a bank makes an advance to the buyer to settle an import sight bill. The advance is generally for a certain period. On the due date, the buyer is required to settle the bill with interest at an agreed rate.


Profit Margin
A measure of a company's profitability. It is calculated by dividing net profit by sales and is usually expressed as a percentage.


Return on Equity (ROE)
A measure of the return on each dollar of shareholder investment. It is calculated by dividing net profit by equity and is usually expressed as a percentage.

Stock Turnover
A measure of inventory performance to show how fast stock is converted from purchases to sales. It is calculated by dividing stock level by cost of sales x 365 days


Term Loan
A loan for a fixed period of more than one year and repayable by regular installments.

Some Simple yet important terms

written down value (WDV)
Net book value of an asset computed by deducting the accumulated depreciation or amortization from the value shown in the account books (the book value).

Operating Expense or "OPEX"
A category of expenditure that a business incurs as a result of performing its normal business operations.For example, the payment of employees' wages and funds allocated toward research and development are operating expenses.

Operating Revenue
Income derived from sources related to a company's everyday business operations. For example, in the case of a retail business, inventory sales generate operating revenue, whereas the sale of a warehouse does not. Instead, the latter sale is considered to be an unexpected, or "one-time", event.
Also referred to as "regular revenue".

Operating Profit
The profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments.
Also known as "earnings before interest and tax" (EBIT).

Calculated as:
Operating Profit = Operating Revenue - Operating Expense


Substance over form:

When an entity practice the Substance Over Form, it means that the financial statements reflect the financial reality of the entity (Substance) rather than the legal form of the transactions and events(Form) which underlie them.To put it very simply: if it is a goat but it was disguised in a legal form to look like a dog, Substance Over Form would prevail to reinstate that it is a goat and not a dog!

To be able to differentiate Substance Over Form, we need to be vigilant, have very good inner knowledge of the company’s operation and takes a more investigative in-depth approach so as to seek further evidence or proof. This is because normally these types of events or transactions are often quite complex. These events or transactions happen just around the accounting year ended. (balance sheet date)

We have seen many cases whereby many accounting fraud occur as a result of this lack of Substance Over Form.

Cases like Enron and Computer Associate are describe below:

Examples:Exchanging revenue/revenue swap:

In the Computer Associate case, the CEO of the company swap or exchange revenue with another company. What it did was CSA purchased a certain software/service from the company A and in turn company A also purchased from CSA. Its look like a sale and it being recognized as revenues in the Income Statement

In the Enron’s case we have:

Enron group’s use of over 3000 Special Purpose Entities (SPEs) structured in such a way as to enable the company to avoid including extensive debt in the consolidated financial statements of the group.

Other examples like:-
Company itself fund its own revenue

An outright purchase of capital equipment, whereas in fact the substance of the transactions is a lease of (or perhaps an option to purchase) the equipment.

Accrued and deffered cost:-

Accrued costs are costs for services or materials received, but for which payment has not been made. Example - you order 1600 cubic yards of concrete. It is delivered to your site in 16 weekly increments of 100 cubic yards. You receive a bill at the end of the 16 weeks. The accrued cost reflects the cost of concrete delivered in a reporting period prior to receiving the bill. This is money that should be set aside (and costs to balance against earned value for the material).

Deferred cost are for services or materials not yet received, but for which payment has been made. Example - you purchase a plane ticket 6 weeks before a planned trip. The cost is incurred, but reporting may be deferred until the trip is made and value is earned.

Difference b/w prepaid and deffered expenses:-

prepaid expenses are those which we pay in advance! like rent of a building , its a prepaid expense . we first pay the rent and then use the building whenever we need.
deffered expenses are those which have been accumulated and are not paid yet. for example if we do not pay the rent of the building for 5 months , so it has been deffered means accumulated!

A prepaid expense usually relates to a specific time frame, like pre-paying rent as mentioned above. Whereas a deferred expense may not have a specific time frame in which to be recognized. It might even be a partial expense which will continue to increase (whether actually paid or not) until the time comes when it will be amortized. An example might be costs associated with the acquisution of a business or product line. Those costs might continue to accrue as deferred expenses for months (or longer) until the transaction is complete and revenues begin to flow.

Gross and Net

Gross is the profit from the transaction without deduction. Net is the profit from the transaction after deducting cost of goods and cost of the sale (manpower, taxes, rent, etc.)

Difference between amortization, depreciation and depletion

Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally expensed based on the time period over which the asset was used. Both depreciation and amortization (as well as depletion) are methods that are used to prorate the cost of a specific type of asset to the asset's life. It is important to mention that these methods are calculated by subtracting the asset's salvage value from its original cost.

Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.

Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out over the predicted life of the oil well.

"Salvage Value"

The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting to determine depreciation amounts and in the tax system to determine deductions. The value can be a best guess of the end value or can be determined by a regulatory body such as the IRS.

Explaination of Salvage Value
The salvage value is used in conjunction with the purchase price and accounting method to determine the amount by which an asset depreciates each period. For example, with a straight-line basis, an asset that cost $5,000 and has a salvage value of $1,000 and a useful life of five years would be depreciated at $800 ($5,000-$1,000/5 years) each year.

Within the tax system, when a person donates a car he or she receives a tax deduction. The value of this deduction depends on the salvage value of the car. This salvage value is determined to be the current fair market value that could be obtained had the car been sold on that day rather than donated.

"Amortization"

What Does Amortization Mean?
1. The paying off of debt in regular installments over a period of time.

2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.

Explaination of Amortization
Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense.

While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.

"Accrual Accounting"

Definition: An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.

Accrual accounting is considered to be the standard accounting practice for most companies, with the exception of very small operations. This method provides a more accurate picture of the company's current condition, but its relative complexity makes it more expensive to implement. This is the opposite of cash accounting, which recognizes transactions only when there is an exchange of cash.

Explaination of Accrual Accounting
The need for this method arose out of the increasing complexity of business transactions and a desire for more accurate financial information. Selling on credit and projects that provide revenue streams over a long period of time affect the company's financial condition at the point of the transaction. Therefore, it makes sense that such events should also be reflected on the financial statements during the same reporting period that these transactions occur.

For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.

Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue.

"Fair Value Definition, Relevance and measurement"

What is Fair Value? Definition.
Fair Value is an accounting term, originally defined by the SEC.

Under GAAP, the fair value of an asset is the amount at which that
asset could be bought or sold in a current transaction between
willing parties, other than in a liquidation. On the other side of
the balance sheet, the fair value of a liability is the amount at
which that liability could be incurred or settled in a current
transaction between willing parties, other than in a liquidation.
If available, a quoted market price in an active market is the best
evidence of fair value and should be used as the basis for the
measurement. If a quoted market price is not available, preparers
should make an estimate of fair value using the best information
available in the circumstances. In many circumstances, quoted market
prices are unavailable. As a result, difficulties occur when making
estimates of fair value.

Why Fair Value accounting? Relevance.

In today's dynamic and volatile markets, whether it is to buy or
sell, what people want to know is what an asset is worth today.

Accounting research supports that assertion. The FASB, after
extensive discussions, has concluded that fair value is the most
relevant measure for financial instruments. In its deliberations of
Statement 133, the FASB revisited that issue and again renewed its
commitment to eventually measuring all financial instruments at fair
value.

Fair value accounting provides more transparency than historical
cost based measurements. Maybe, if companies in the United States
and Asia had measured all financial instruments at fair value,
regulators, depositors, and investors could have achieved greater
regulatory and market discipline and avoided some of the losses that
investors and taxpayers have had to pay during previous downturns in
the economy.

All about IPOs and FPOs

What is an Initial Public Offering?
Initial Public Offering, IPO, is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.

What is a Follow on Public Offering?
A Follow on Public Offering, FPO, is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

What is a Fixed Price IPO?
It’s an issue where issuing company defines single price per share. After subscription, company decides the basis of allotment depending upon under/over subscription. On this basis an applicant may or may not get allotment of shares.

What is a Book Building IPO?
It’s an issue where issuing company defines a price range i.e floor (lower) price and Cap (Upper) price. After subscription, company decides the basis of allotment depending upon under/over subscription. On this basis an applicant may or may not get allotment of shares.

What is a Cut Off Price?
In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut Off Price”. Only retail individual investors have an option of applying at Cut Off Price.

How is the Retail Investor defined as?
‘Retail Individual Investor’ means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000/

What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or preferential
issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below:Public issues can be further classified into Initial Public offerings andfurther public offerings. In a public offering, the issuer makes an offer fornew investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offerdocument and offers it for subscription.

The significant features are illustrated below:

Issues
Public Preferential Rights
Initial Public Offering Further Public Offering
Fresh Issue Offer for sale Fresh Issue Offer for sale

Initial Public Offering (IPO) is when an unlisted company makes either a
fresh issue of securities or an offer for sale of its existing securities or
both for the first time to the public. This paves way for listing and trading
of the issuer’s securities.

A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.

A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP)
What are the eligibility norms for making these issues?
SEBI has laid down eligibility norms for entities accessing the primary market through public issues. There is no eligibility norm for a listed compaNy making a rights issue as it is an offer made to the existing shareholders who are expected to know their company. The main entry norms for companies making a public issue (IPO or FPO) are summarized as under:

Entry Norm I (EN I): The company shall meet the following
requirements:
(a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.
(b) Distributable profits in atleast three years
(c) Net worth of at least Rs. 1 crore in three years
(d) If change in name, atleast 50% revenue for preceding 1 year should be from the new activity.
(e) The issue size does not exceed 5 times the pre- issue net worth
To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to company not satisfying any of the above conditions, for accessing the primary Market, as under:

Entry Norm II (EN II):
(a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years
OR
Entry Norm III (EN III):
(a) The “project” is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years.
In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria of having at least 1000 prospective allotees in its issue

Some financial Terma

What Does Due Diligence - DD Mean?
1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Explaination of Due Diligence - DD
1. Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.

2. Due diligence is a way of preventing unnecessary harm to either party involved in a transaction.

What Does Economic Order Quantity - EOQ Mean?
An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:

EOQ=Sqrt(2SD/PI)

where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)

What Does Securitization Mean?
The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

Explaination of Securitization
Mortgage-backed securities are a perfect example of securitization. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's inherent risk of default and then sell those smaller pieces to investors.

The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. Using the mortgage-backed security example, individual retail investors are able to purchase portions of a mortgage as a type of bond. Without the securitization of mortgages, retail investors may not be able to afford to buy into a large pool of mortgages.

Taxes

Taxes Paid by the Individual
There are 7 types of taxes that are paid for by an individual.
1. Income Taxes: These taxes are paid out by anyone who earns an income by any means.
2. Property Taxes: These are paid by anyone who owns property such as land, a home or commercial real estate. These taxes are often collected by the state and county to help fund their budgets. While income taxes are subject to deductions or credits, these taxes are often fairly rigid. Licensing fees on cars, recreational vehicles and watercraft are property taxes as well.
3. Consumptive Taxes: These are taxes on sales goods or items that are subjected to being used by either an individual or business.
Taxes Paid by Businesses
Taxes paid by businesses
4. Corporate Taxes: A levy placed on the profit of a firm; different rates are used for different levels of profits.
5. Payroll Taxes: These taxes are taken out by the businesses before income is distributed to the individual in exchange for the work that was done. These are commonly called "FUDA" and "FICA"
OR
It is a Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee
Other Taxes
6. Capital Gains: These taxes are paid on investments that have appreciated. Frequently these investments have been sold. Examples would be stocks, bonds, and real estate.
7. Inheritance or Estate Taxes: An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of an individual. It is a tax on the estate, or total value of the money and property, of a person who has died.[1] In international tax law, there is a distinction between an estate tax and an inheritance tax: an estate tax taxes the personal representatives of the deceased, while an inheritance tax taxes the beneficiaries of the estate.

P O E M — “ ON RECESSION ”

NPA‘s are on the rise,
Everywhere I can hear nothing but cries.
Asset backed securities have taken a beating,
Why the borrowers are packing and fleeing.
This recession might seem to subside
But for sure has hurt our financial pride.
Oh, what we are seeing today is financial recession,
Oh, please not another Great Depression.
Our financial markets have nosedived,
Till now no sector seems to have revived.
Everything has taken a beating,
And even the Moody‘s and S&P‘s rating.
Lehmann Bros. fell like a pack of cards,
For other financial institutions there is no guard.