Definition of Leasehold improvement

Leasehold improvement

This is any upgrade to leased property by a lessee that will be
usable for more than one year, and which exceeds the lessee’s capitalization limit.
It is recorded as a fixed asset and depreciated over a period no longer than the life
of the underlying lease.

Leasehold improvements

The cost of improvements made to property that the company leases.

Land improvements

The cost of improvements to land owned by the company, such as fencing and outdoor lighting.

continuous improvement

an ongoing process of enhancing employee task performance, level of product quality, and level of company service through eliminating nonvalue-added activities to reduce lead time, making products
(performing services) with zero defects, reducing
product costs on an ongoing basis, and simplifying products
and processes

Farm Improvement and Marketing Cooperatives Loans Act

See here

Land

The cost of land owned by the company.

economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

PPF (periodic perpetuity factor)

a generalization formula invented by Abrams that is the present value of regular but noncontiguous cash flows that have constant growth to perpetuity.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Accounts receivable turnover

The ratio of net credit sales to average accounts receivable, a measure of how
quickly customers pay their bills.

Acquisition of assets

A merger or consolidation in which an acquirer purchases the selling firm's assets.

Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs

The incremental costs of having an agent make decisions for a principal.

All or none

Requirement that none of an order be executed unless all of it can be executed at the specified price.

All-in cost

Total costs, explicit and implicit.

All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

Asset

any possession that has value in an exchange.

Asset/equity ratio

The ratio of total assets to stockholder equity.

Asset/liability management

Also called surplus management, the task of managing funds of a financial
institution to accomplish the two goals of a financial institution:
1) to earn an adequate return on funds invested, and
2) to maintain a comfortable surplus of assets beyond liabilities.

Asset activity ratios

Ratios that measure how effectively the firm is managing its assets.

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Asset-based financing

Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Asset classes

Categories of assets, such as stocks, bonds, real estate and foreign securities.

Asset-coverage test

A bond indenture restriction that permits additional borrowing on if the ratio of assets to
debt does not fall below a specified minimum.

Asset for asset swap

Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Asset pricing model

A model for determining the required rate of return on an asset.

Asset substitution

A firm's investing in assets that are riskier than those that the debtholders expected.

Asset substitution problem

Arises when the stockholders substitute riskier assets for the firm's existing
assets and expropriate value from the debtholders.

Asset swap

An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
provide a better match with its iabilities.

Asset turnover

The ratio of net sales to total assets.

Asset pricing model

A model, such as the Capital asset Pricing Model (CAPM), that determines the required
rate of return on a particular asset.

Assets

A firm's productive resources.

Assets requirements

A common element of a financial plan that describes projected capital spending and the
proposed uses of net working capital.

At-the-money

An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Average life

Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
paydowns.

Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Blue-chip company

Large and creditworthy company.

Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.

Buy limit order

A conditional trading order that indicates a security may be purchased only at the designated
price or lower.
Related: Sell limit order.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Capital lease

A lease obligation that has to be capitalized on the balance sheet.

Capitalization

The debt and/or equity mix that fund a firm's assets.

Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.

Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.

Capitalization table

A table showing the capitalization of a firm, which typically includes the amount of
capital obtained from each source - long-term debt and common equity - and the respective capitalization
ratios.

Carring costs

costs that increase with increases in the level of investment in current assets.

Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.

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.

Company-specific risk

Related: Unsystematic risk

Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.

Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.

Cost of capital

The required return for a capital budgeting project.

Cost of carry

Related: Net financing cost

Cost of funds

Interest rate associated with borrowing money.

Cost of lease financing

A lease's internal rate of return.

Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

Cover

The purchase of a contract to offset a previously established short position.

Coverage ratios

Ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

Covered call

A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Covered Put

A put option position in which the option writer also is short the corresponding stock or has
deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the
option writer's risk because money or stock is already set aside. In the event that the holder of the put option
decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put
option.

Credit period

The length of time for which the customer is granted credit.

Crossover rate

The return at which two alternative projects have the same net present value.

Current assets

Value of cash, accounts receivable, inventories, marketable securities and other assets that
could be converted to cash in less than 1 year.

Debt limitation

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

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.

Deferred nominal life annuity

A monthly fixed-dollar payment beginning at retirement age. It is nominal
because the payment is fixed in dollar amount at any particular time, up to and including retirement.

Depository Trust Company (DTC)

DTC is a user-owned securities depository which accepts deposits of
eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in
its custody, and provides for withdrawals of securities from its custody.

Direct lease

lease in which the lessor purchases new equipment from the manufacturer and leases it to the
lessee.

Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

Dividend limitation

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

Doctrine of sovereign immunity

Doctrine that says a nation may not be tried in the courts of another country
without its consent.

Double-dip lease

A cross-border lease in which the disparate rules of the lessor's and lessee's countries let
both parties be treated as the owner of the leased equipment for tax purposes.

Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

Dynamic asset allocation

An asset allocation strategy in which the asset mix is mechanistically shifted in
response to -changing market conditions, as in a portfolio insurance strategy, for example.

End-of-year convention

Treating cash flows as if they occur at the end of a year as opposed to the date
convention. Under the end-of-year convention, the present is time 0, the end of year 1 occurs one year hence,
etc.

Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Evaluation period

The time interval over which a money manager's performance is evaluated.

Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.

Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.

Financial assets

Claims on real assets.

Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).

Financial lease

Long-term, non-cancelable lease.

Fixed asset

Long-lived property owned by a firm that is used by a firm in the production of its income.
Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents,
trademarks, and customer recognition.

Fixed asset turnover ratio

The ratio of sales to fixed assets.

Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.

Fixed-annuities

Annuity contracts in which the insurance company or issuing financial institution pays a
fixed dollar amount of money per period.

Fixed-charge coverage ratio

A measure of a firm's ability to meet its fixed-charge obligations: the ratio of
(net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid
plus long-term lease payments).

Fixed-dates

In the Euromarket the standard periods for which Euros are traded (1 month out to a year out) are
referred to as the fixed dates.

Fixed-dollar obligations

Conventional bonds for which the coupon rate is set as a fixed percentage of the par value.

Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.

Fixed-exchange rate

A country's decision to tie the value of its currency to another country's currency, gold
(or another commodity), or a basket of currencies.

Fixed-income equivalent

Also called a busted convertible, a convertible security that is trading like a straight
security because the optioned common stock is trading low.

Fixed-income instruments

assets that pay a fixed-dollar amount, such as bonds and preferred stock.

Fixed-income market

The market for trading bonds and preferred stock.

Fixed price basis

An offering of securities at a fixed price.

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