Definition of Letter of Intent

Letter of Intent

A document signifying genuine interest in reaching a final agreement, conditional upon the results of more detailed due diligence and negotiations.

Letter of credit (L/C)

A form of guarantee of payment issued by a bank used to guarantee the payment of
interest and repayment of principal on bond issues.

Letter stock

Privately placed common stock, so-called because the SEC requires a letter from the purchaser
stating that the stock is not intended for resale.

Letter of comment

A communication to the firm from the SEC that suggests changes to its registration
statement.

Shareholders' letter

A section of an annual report where one can find jargon-free discussions by
management of successful and failed strategies which provides guidance for the probing of the rest of the
report.

Side Letter

A separate agreement that is used to clarify or modify the terms of a sales agreement.
Side letters become a problem for revenue recognition when they undermine a sales agreement
by effectively negating some or all of an agreement's underlying terms and are maintained
outside of normal reporting channels.

Letters of Credit

A letter of credit is a guarantee of payment by a bank (issuing institution)to a third party for a specific amount of money, if certain conditions are met.

Acquisition of stock

A merger or consolidation in which an acquirer purchases the acquiree's stock.

Adjustable rate preferred stock (ARPS)

Publicly traded issues that may be collateralized by mortgages and MBSs.

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

Auction rate preferred stock (ARPS)

Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

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/other equity

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

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 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.

Comparative credit analysis

A method of analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.

Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve these conflicts.

Consumer credit

credit granted by a firm to consumers for the purchase of goods or services. Also called
retail credit.

Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

Convertible preferred stock

Preferred stock that can be converted into common stock at the option of the holder.

Credit

Money loaned.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Credit enhancement

Purchase of the financial guarantee of a large insurance company to raise funds.

Credit period

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

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk

Credit scoring

A statistical technique wherein several financial characteristics are combined to form a single
score to represent a customer's creditworthiness.

Credit spread

Related:Quality spread

Crediting rate

The interest rate offered on an investment type insurance policy.

Creditor

Lender of money.

Cumulative preferred stock

Preferred stock whose dividends accrue, should the issuer not make timely
dividend payments. Related: non-cumulative preferred stock.

Demand line of credit

A bank line of credit that enables a customer to borrow on a daily or on-demand basis.

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

Employee stock fund

A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.

Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of
employees.

Eurocredits

Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and
government borrowers.

Evergreen credit

Revolving credit without maturity.

Exchange of stock

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

Federal credit agencies

Agencies of the federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Five Cs of credit

Five characteristics that are used to form a judgement about a customer's creditworthiness:
character, capacity, capital, collateral, and conditions.

Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.

Full faith-and-credit obligations

The security pledges for larger municipal bond issuers, such as states and
large cities which have diverse funding sources.

Growth stock

Common stock of a company that has an opportunity to invest money and earn more than the
opportunity cost of capital.

Income stock

Common stock with a high dividend yield and few profitable investment opportunities.

Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Listed stocks

stocks that are traded on an exchange.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Listed stocks

stocks that are traded on an exchange.

Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

New York Stock Exchange (NYSE)

Also known as the Big Board or The Exhange. More than 2,00 common
and preferred stocks are traded. The exchange is the older in the United States, founded in 1792, and the
largest. It is lcoated on Wall Street in New York City

Non-cumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the
company misses a dividend payment.
Related: Cumulative preferred stock

Philadelphia Stock Exchange (PHLX)

A securities exchange where American and European foreign
currency options on spot exchange rates are traded.

Preferred equity redemption stock (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.

Preference stock

A security that ranks junior to preferred stock but senior to common stock in the right to
receive payments from the firm; essentially junior preferred stock.

Preferred stock

A security that shows ownership in a corporation and gives the holder a claim, prior to the
claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most
preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar
amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares
characteristics of both common stock and debt.

Preferred stock agreement

A contract for preferred stock.

Repurchase of stock

Device to pay cash to firm's shareholders that provides more preferable tax treatment
for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been
repurchased by the firm. A repurchase is achieved through either a dutch auction, open market, or tender offer.

Retail credit

credit granted by a firm to consumers for the purchase of goods or services.
See: consumer credit.

Reverse stock split

A proportionate decrease in the number of shares, but not the value of shares of stock
held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a
1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the
reverse split, the firm's stock price is, in this example, worth three times the pre-reverse split price. A firm
generally institutes a reverse split to boost its stock's market price and attract investors.

Revolving credit agreement

A legal commitment wherein a bank promises to lend a customer up to a
specified maximum amount during a specified period.

Revolving line of credit

A bank line of credit on which the customer pays a commitment fee and can take
down and repay funds according to his needs. Normally the line involves a firm commitment from the bank
for a period of several years.

Stock

Ownership of a corporation which is represented by shares which represent a piece of the corporation's
assets and earnings.

Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.

Stock exchanges

Formal organizations, approved and regulated by the Securities and Exchange Commission
(SEC), that are made up of members that use the facilities to exchange certain common stocks. The two major
national stock exchanges are the New York stock Exchange (NYSE) and the American stock Exchange (ASE
or AMEX). Five regional stock exchanges include the Midwest, Pacific, Philadelphia, Boston, and Cincinnati.
The Arizona stock exchange is an after hours electronic marketplace where anonymous participants trade
stocks via personal computers.

Stock repurchase

A firm's repurchase of outstanding shares of its common stock.

Stock selection

An active portfolio management technique that focuses on advantageous selection of
particular stocks rather than on broad asset allocation choices.

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.

Stock index option

An option in which the underlying is a common stock index.

Stock market

Also called the equity market, the market for trading equities.

Stock option

An option in which the underlying is the common stock of a corporation.

Stock replacement strategy

A strategy for enhancing a portfolio's return, employed when the futures
contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills
portfolio and a stock portfolio.

Stock split

Occurs when a firm issues new shares of stock but in turn lowers the current market price of its
stock to a level that is proportionate to pre-split prices. For example, if IBM trades at $100 before a 2-for-1
split, after the split it will trade at $50 and holders of the stock will have twice as many shares than they had
before the split. See: split.

Stock ticker

This is a lettered symbol assigned to securities and mutual funds that trade on U.S.financial exchanges.

Stockholder

Holder of equity shares in a firm.

Stockholder's books

Set of books kept by firm management for its annual report that follows Financial
Accounting Standards Board rules. The tax books follow IRS tax rules.

Stockholder's equity

The residual claims that stockholders have against a firm's assets, calculated by
subtracting total liabilities from total assets.

Stockout

Running out of inventory.

Trade credit

credit granted by a firm to another firm for the purchase of goods or services.

Treasury stock

Common stock that has been repurchased by the company and held in the company's treasury.

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)

Earnings per share of common stock

How much profit a company made on each share of common stock this year.

RATE OF RETURN ON STOCKHOLDERS’ EQUITY

The percentage return or profit that management made on each dollar stockholders invested in a company. Here’s how you figure it:
(Net income) / (stockholders’ equity)

RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (stockholders’ equity)

STOCK

Certificates that signify ownership in a corporation. A share of stock represents a claim on a portion of the company’s assets.

STOCKHOLDERS’ (OR OWNERS’) EQUITY

The value of the owners’ interests in a company.

Credit

Buying or selling goods or services now with the intention of payment following at some time in
the future (as opposed to buying or selling goods or services for cash).

Creditors

Purchases of goods or services from suppliers on credit to whom the debt is not yet paid. Or a
term used in the Balance Sheet to denote current liabilities.

Stock

See inventory.

Common stock

Shares of ownership sold to the public.

Credit

One side of a journal entry, usually depicted as the right side.

No par value stock

stock issued by the company that does not have an arbitrary value (par value) assigned to it.

Stated value stock

stock issued by the company that does not have a par value, but does have a stated value. For accounting purposes, stated value is functionally equivalent to par value.

Stockholders' equity

The total amount of contributed capital and retained earnings; synonymous with shareholders’ equity.

Treasury stock

Shares that were sold to the public but have since been repurchased by the company in the open market. Treasury stock is deducted from the equity section, and is therefore a contraequity account.

capital stock

Ownership shares issued by a business corporation. A business
corporation may issue more than one class of capital stock shares.
One class may give voting privileges in the election of the directors of the
corporation while the other class does not. One class (called preferred
stock) may entitle a certain amount of dividends per share before cash
dividends can be paid on the other class (usually called common stock).
stock shares may have a minimum value at which they have to be issued
(called the par value), or stock shares can be issued for any amount
(called no-par stock). stock shares may be traded on public markets such
as the New York stock Exchange or over the Nasdaq network. There are
about 10,000 stocks traded on public markets (although estimates vary
on this number). In this regard, I find it very interesting that there are
more than 8,000 mutual funds that invest in stocks.

stockholders' equity, statement of changes in

Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.

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.

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 Preferred Stock

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

Preferred Stock

A type of equity security where holders have a claim on the assets
and earnings of a company after the debt providers but before the
holders of common stock. Preferred stock generally pays a fixed
or floating rate dividend each year.

Employee Stock Ownership Plan (ESOP)

a profit-sharing compensation program in which investments are made in
the securities of the employer

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