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Irrelevance result

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Definition of Irrelevance result

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Irrelevance result

The Modigliani and Miller theorem that a firm's capital structure is irrelevant to the firm's
value.



Related Terms:

MM dividend-irrelevance proposition

Theory that under ideal conditions, the value of the firm is unaffected by dividend policy.


MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.


results benchmarking

benchmarking in which an end product or service is examined; the focus is on product/service specifications and performance results


Underlying Results

Earnings after removing the effects of nonrecurring or nonoperating items.


Advance commitment

A promise to sell an asset before the seller has lined up purchase of the asset. This
seller can offset risk by purchasing a futures contract to fix the sales price.



Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.


Asymmetric information

Information that is known to some people but not to other people.


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Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.


Asymmetry

A lack of equivalence between two things, such as the unequal tax treatment of interest expense
and dividend payments.


Audit Committee

A subcommittee of a company's board of directors assigned the responsibility
of ensuring that corporate financial reporting is fair and honest and that an audit is conducted
in a probing and diligent manner.


Bad debt

An account receivable that cannot be collected.


Bad debts

The amount of accounts receivable that is not expected to be collected.


bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.


Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.


BOOK VALUE OF COMMON STOCK

The theoretical amount per share that each stockholder would receive if a company’s assets were sold on the balance sheet’s date. Book value equals:
(Stockholders’ equity) / (Common stock shares outstanding)


Cash commodity

The actual physical commodity, as distinguished from a futures contract.


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Cash dividend

A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and return of capital in
addition to the dividend.


cash dividend

Payment of cash by the firm to its shareholders.



Cash flow per common share

Cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.


Commercial Bank

A privately owned, profit-seeking firm that accepts deposits and makes loans.


Commercial Business Loan (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for business purposes.


Commercial draft

Demand for payment.


Commercial Mortgage

A loan made on real estate collateral, other than a residential property, in which a mortgage is given to secure payment of principal and interest.


Commercial paper

Short-term unsecured promissory notes issued by a corporation. The maturity of
commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.


commercial paper

Short-term unsecured notes issued by firms.


Commercial risk

The risk that a foreign debtor will be unable to pay its debts because of business events,
such as bankruptcy.


Commission

The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or
their dollar value. In 1975, deregulation led to the creation of discount brokers, who charge lower
commissions than full service brokers. Full service brokers offer advice and usually have a full staff of
analysts who follow specific industries. Discount brokers simply execute a client's order -- and usually do not
offer an opinion on a stock. Also known as a round-turn.


Commission broker

A broker on the floor of an exchange acts as agent for a particular brokerage house and
who buys and sells stocks for the brokerage house on a commission basis.



Commission house

A firm which buys and sells future contracts for customer accounts. Related: futures
commission merchant, omnibus account.


Commitment

A trader is said to have a commitment when he assumes the obligation to accept or make
delivery on a futures contract. Related: Open interest


Commitment fee

A fee paid to a commercial bank in return for its legal commitment to lend funds that have
not yet been advanced.


committed cost

a cost related either to the long-term investment
in plant and equipment of a business or to the
organizational personnel whom top management deem
permanent; a cost that cannot be changed without longrun
detriment to the organization


Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s Performance Presentation Standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.


Commodities Exchange Center (CEC)

The location of five New York futures exchanges: Commodity
Exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton Exchange,
the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.


Commodity

A commodity is food, metal, or another physical substance that investors buy or sell, usually via
futures contracts.


Common-base-year analysis

The representing of accounting information over multiple years as percentages
of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.


common body of knowledge (CBK)

the minimum set of knowledge needed by a person to function effectively in a particular field


Common market

An agreement between two or more countries that permits the free movement of capital
and labor as well as goods and services.


Common Shares

Are equity instruments that take no security against assets, have no fixed terms of repayment and pay no fixed dividends.


common-size balance sheet

Balance sheet that presents items as a percentage of total assets.


common-size income statement

Income statement that presents items as a percentage of revenues.


Common stock

These are securities that represent equity ownership in a company. Common shares let an
investor vote on such matters as the election of directors. They also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.


Common stock

Shares of ownership sold to the public.


Common Stock

A financial security that represents an ownership claim on the
assets and earnings of a company. This claim is valid after the
claims of the debt providers and preferred stockholders have been
satisfied.


common stock

Ownership shares in a publicly held corporation.


Common Stock

That part of the capital stock of a corporation that carries voting rights and represents
the last claim on assets and dividends.


Common stock equivalent

A convertible security that is traded like an equity issue because the optioned
common stock is trading high.


Common stock market

The market for trading equities, not including preferred stock.


Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.


Common stock ratios

Ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.


compensation committee

a company committee comprised mainly of members of the board of directors; is responsible
for establishing compensation packages for top management
and setting general compensation policies and guidelines


constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.


Contingent immunization

An arrangement in which the money manager pursues an active bond portfolio
strategy until an adverse investment experience drives the then-available potential return down to the safetynet
level. When that point is reached, the money manager is obligated to pursue an immunization strategy to
lock in the safety-net level return.


Cost of Common Stock

The rate of return required by the investors in the common stock of
the company. A component of the cost of capital.


Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.


Cum dividend

With dividend.


Cumulative dividend feature

A requirement that any missed preferred or preference stock dividends be paid
in full before any common dividend payment is made.


Debt

Money borrowed.


Debt

Borrowings from financiers.


Debt

Funds owed to another entity.


Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.


Debt Capacity

An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.


Debt (Credit Insurance)

Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. debt may or may not be secured.


Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.


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.


Debt/Equity Ratio

A comparison of debt to equity in a company's capital structure.


Debt Financing

Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.


Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.


Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.


Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.


Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.


Debt market

The market for trading debt instruments.


Debt ratio

Total debt divided by total assets.


Debt Ratio

The percentage of debt that is used in the total capitalization of a
company. It is calculated by dividing the total book value of the
debt by the book value of all assets.


Debt relief

Reducing the principal and/or interest payments on LDC loans.


Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.


Debt Security

A security representing a debt relationship with an enterprise, including a government
security, municipal security, corporate bond, convertible debt issue, and commercial
paper.


Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.


Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.


Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).


Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.


debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.


Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.


Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.


Debtors

Sales to customers who have bought goods or services on credit but who have not yet paid their debt.


Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.


Dividend

A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock
selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.


Dividend

A payment a company makes to stockholders. Earnings before income tax. The profit a company made
before income taxes.


Dividend

The payment of after-tax profits to shareholders as their share of the profits of the business for an accounting period.


Dividend

A payment made to shareholders that is proportional to the number of shares
owned. It is authorized by the Board of Directors.


dividend

Periodic cash distribution from the firm to its shareholders.


Dividend

As the term dividend relates to a corporation's earnings, a dividend is an amount paid per share from a corporation's after tax profits. Depending on the type of share, it may or may not have the right to earn any dividends and corporations may reduce or even suspend dividend payments if they are not doing well. Some dividends are paid in the form of additional shares of the corporation. dividends paid by Canadian corporations qualify for the dividend tax credit and are taxed at lower rates than other income.
As the term dividend relates to a life insurance policy, it means that if that policy is "participating", the policy owner is entitled to participate in an equitable distribution of the surplus earnings of the insurance company which issued the policy. Surpluses arise primarily from three sources:
1) the difference between anticipated and actual operating expenses,
2) the difference between anticipated and actual claims experience, and
3) interest earned on investments over and above the rate required to maintain policy reserves. Having regard to the source of the surplus, the "dividend" so paid can be considered, in part at least, as a refund of part of the premium paid by the policy owner.
Life insurance policy owners of participating policies usually have four and sometimes five dividend options from which to choose:
1) take the dividend in cash,
2) apply the dividend to reduce current premiums,
3) leave the dividends on deposit with the insurance company to accumulate at interest like a savings plan,
4) use the dividends to purchase paid-up whole life insurance to mature at the same time as the original policy,
5) use the dividends to purchase one year term insurance equal to the guaranteed cash value at the end of the policy year, with any portion of the dividend not required for this purpose being applied under one of the other dividend options.
NOTE: It is suggested here that if you have a participating whole life policy and at the time of purchase received a "dividend projection" of incredible future savings, ask for a current projection. Life insurance company's surpluses are not what they used to be.


Dividend

Unlike dividends which are paid to company shareholders, participating insurance policy dividends are not based on the company's overall profits. Rather, they are determined by grouping policies by type and country of issue and looking at how each class contributes to the company's earnings and surplus.


Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.


Dividend clientele

A group of shareholders who prefer that the firm follow a particular dividend policy. For
example, such a preference is often based on comparable tax situations.


dividend discount model

Computation of today’s stock price which states that share value equals the present value of all expected future dividends.


Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.


dividend growth method

a method of computing the cost
of common stock equity that indicates the rate of return
that common shareholders expect to earn in the form of
dividends on a company’s common stock


Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.


Dividend income

Income that a company receives in the form of dividends on stock in other companies that it holds.


Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.


Dividend payout ratio

Percentage of earnings paid out as dividends.


dividend payout ratio

Computed by dividing cash dividends for the year
by the net income for the year. It’s simply the percent of net income distributed
as cash dividends for the year.


dividend payout ratio

Percentage of earnings paid out as dividends.



 

 

 

 

 

 

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