Investment Banking.txt

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Investment Banking.txt
2012-01-31 20:40:43
Investment banking

questions for investment banking
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  1. Quick Ratio or Acid Test Ratio
    (Current Assets - Inventory) / Current Liabilities
  2. Current Ratio
    Current Assets / Current Liabilities
  3. Cash Ratio
    (Current assets - Inventory - Receiveables ) / Current Liabilities
  4. Cash Conversion Cycle (CCC)
    • DIO + DSO + DPO
    • Days Inventory Outstanding
    • +
    • Days Sales (Receiveable) Outstanding
    • +
    • Days Payable Outstanding
  5. Earnings
    = Income = Profit
  6. Revenue
    = Sales
  7. Gross Profit Ratio
    Gross Profit / Revenue

    Gross Profit = Revenue - COGS
  8. Operating Profit Ratio
    Operating Profit / Revenue
  9. Pre-Tax Profit Ratio
    Pre-Tax Profit / Revenue
  10. Net Profit Ratio
    Net Profit / Revenue
  11. Gross Profit Margin
    (Revenues - COGS) / Revenues
  12. Gross Profit
    Revenues - COGS
  13. Operating Profit
    EBIT - Earnings Before Interest and Tax
  14. Operating Profit Margin
    EBIT / Revenues
  15. Return on Investment (ROI)
    (Gain - Cost) / Cost
  16. Return on Assets (ROA)
    • Income / Average Total Assets
    • or
    • Profits / Average Total Assets
  17. Return on Equity (ROE)
    • Income / Average Shareholder Equity
    • or
    • Profit / Average Shareholder Equity
  18. Debt Ratio
    Total Liabilities / Total Assets

    A good measure of LEVERAGE
  19. Debt Equity Ratio
    Total Liabilities / Total Shareholder Equity

    a good measure of LEVERAGE
  20. Capitalization Ratio
    Long Term Debt / (Long Term Debt + Shareholder Equity)

    how much role log term debt plays in the capital structure of the company

    a good measure of LEVERAGE
  21. Interest Coverage Ratio
    EBIT / Interest Expenses

    ability of the company to pay its short-term interest paymentrs
  22. Operating Cycle
    DIO + DSO - DPO

    How many days it takes to for a company to convert purchases of inventory into cash receipts

    Twin of "Cash conversion cycle"
  23. Days Inventory Outstanding (DIO)
    Average Inventory / ( Cost of Sales / 365)

    Average Inventory = (inventory at beginning of year + inventory at end of year) / 2

    Cost of Sales / 365 = Cost of Sales per Day
  24. Days Sales Outstanding (DSO)
    • Average Account Receivable / (Sales / 365)
    • = 365* Accounts Receivable / Sales
    • Average Account Receiveable = (account receivable at beginning of year + account receivable at end of year) / 2

    Sales / 365 = Sales per Day
  25. Days Payable Outstanding (DPO)
    Average account payable / (Cost of Sales / 365)

    Average account payable = (account payable at beginning of year + account payable at end of year) / 2

    Cost of Sales /365 = Cost of Sales per Day
  26. Fixed Asset Turnover ratio
    Revenue / Property, Plan and Equipment (PPE)
  27. Effective Tax Rate
    Income Tax Expense / Pre-Tax Income
  28. Enterprise Value (EV)
    Equity Value + Total Debt + Preferred Stock + Minority Interests - Cash and Cash equivalents

    Enterprise Value is independent of the capital structure
  29. P/E Ratio
    Share Price / Diluted EPS


    Equity Value / Earnings

    EPS = Earnings per Share
  30. HSR Hart Scott Rodino Act of 1976
    M&A Antitrust regulations
  31. Bond Current Yield
    Annual Interest Rate / MarketPrice of the Bond
  32. Bond Nominal Yield
    Coupon Value
  33. Bond Par Value
    Face value, or principal value of Bond
  34. Bond Yield to Maturity
    (Coupon Value +/- Discount or Premium/number of years) / (Par Value + Current Price)/2
  35. Trust Indenture Act 1939
    TIA requires written agreement of trust indenture for debt above $5M, and an independent trustee
  36. Debentures
    Unsecured debt, based on "good faith"
  37. Bond Conversion ratio
    Par Value / Conversion Price
  38. Parity price of stock
    Market price of the bond / conversion ratio
  39. Parity value of the bond
    Market value of the stock * conversion ratio
  40. Balance Sheet
    Assets = Liabilities + Shareholder Equity
  41. Net Debt
    Total debt - cash equivalents
  42. Inventory Turns
    COGS / Inventory
  43. Days Inventory Held (DIH)
    365 * Inventory / COGS
  44. Regulation A
    Public offering is exempt from SEC registration requirements if the offering does not exceed $5M in 12 months; Issuer files a notification, offering circular and exhibits.
  45. Schedule TO
    • TO - Tender Offer
    • must be filed by entities expect to own more than 5% of the target company's shares
  46. Schedule 13D
    required to be filed by those to declare that they have acquired more than 5% of the public company common stock
  47. Schedule 14 (d)
    provides public information about entities involved in tenders, other than the acquirer
  48. Schedule 14D-9
    must be filed by the target company to announce its response to the tender offer
  49. Underwriting Spread
    difference between the POP - Public Offering Price and the Underwriting Proceeds

    Spread includes the manager's fee, underwriters fee and the selling concessions
  50. Reinvestment Risk
    in downward interest rate scenario, difficulty in finding comparable re-investment opportunities for fixed income
  51. Interest risk
    in upward interest rate scenario, the risk of bond pricing coming down
  52. Book Building
  53. Gun Jumping
    Selling new issues before registering them with SEC
  54. WKSI Well-Known Seasoned Issuers
    • worldwide stock capitalization / public float of $700M plus;
    • has issued at least $1B non-convertable securities in last 3 years;
    • eligible to use Form S-3 for securities offering
  55. Seasoned Issuers
    • worldwide market capitalization of $75M +
    • Can use Form S-3 for filing for primary offerings
  56. Greenshoe
    over-allotment option for underwriters to offer more shares than stated in the underwriting agreement
  57. DCF Discounted Cash Flow Calculations
    EBIAT = EBIT - Taxes

    • FCF = EBIAT + DA - CAPEX - (Increase / decrease) in NWC
    • EBIAT = Earnings before Interest after tax
    • NWC = Net Working Capital
  58. Depreciation
    non-cash expense that reduces the book value of the company's long-term fixed assets or Property, Plant and Equipment (PPE), over an estimated useful life
  59. Amortization
    non-cash expense that reduces the value of the company's definite life intangible assets
  60. Straight line depreciation
    uniform depreciation expense during the life of the asset
  61. Accelerated depreciation
    assets lose most of their value in early years
  62. Rough calculation of Depreciation & Amortization D&A
  63. Intangible assets
    copyrights, NDAs, licenses, patents, trademarks, & intellectual properties, customer lists,
  64. MD&A
    • Management's Discussion and Analysis
    • in Part II of 10-K
  65. Net Working capital (NWC)
    • Current Assets - Current Liabilities (from Balance Sheet)
    • Current Assets = Accounts Receiveable + Inventory + Prepaid expenses & other current assets
    • Current Liabilities = Accounts Payable + accrued liabilities + other current liabilities
  66. Increase in NWC
    • Use of cash,
    • Subtracted from EBIAT
  67. Decrease in NWC
    • Source of cash
    • Added to EBIAT
  68. Where is Depreciation and Amortization
    Cash Flow Statement
  69. Cash Flow Statement includes what sections
    • (1) Operating Activities
    • (2) Investing Activities
    • (3) Financing Activities
    • Added to produce ending cash balance for a particular period
  70. Optimal Capital Structure
    The financing mix of debt and equity that minimizes WACC, thereby maximizing company's theoretical value
  71. Cost of Equity
    • required annual rate of return company's equity investors expects to receive
    • Capital Asset Pricingh Model (CAPM)
    • = r(f) + beta * maket risk premium
  72. Risk Free Rate
    • return on riskless security, such as T-bills, T-Notes and T-Bonds
    • Use as long a period as possible, compare to the lenght of the target company, eg 10 yr or 30 yr T-bonds
  73. Market Risk Premium
    • spread of the expected market return over the risk free rate
    • = r(m) - r(f)
    • about 4% to 8%
  74. Beta
    • Covariance of rate of return for the equity and the overall market return
    • beta of 1.0 - S&P 500 average
    • beta <1 has less systematic risk
    • beta >1 has more systematic risk
  75. WACC - Weighted Average of Cost of Capital
    (r(d) * (1 - t)) * D/(D+E) + r(e) * E/D+E)

    • where
    • r(e) = r(f) + beta * market risk premium + size premium
  76. Methods to calculate Terminal value in DCF
    • Exit Multiple method,
    • and
    • Perpetuity Growth method
  77. Termimal Value (according to Exit Multiple method)
    = EBITDA(n) * Exit multiple
  78. Terminal Value (according to Perpetuity Growth Rate)
    • = FCF (n) * (1 +g) / (r - g)
    • where
    • g = perpetual growth rate
    • r = WACC - discount rate
    • n = terminal year
  79. Discount Factor for DCF
    • = 1 / (1 + WACC ) to the power n
    • where n is the projection period
  80. PV of FCF(n)
    = FCF(n) * Discount Factor (n)
  81. Pros for DCF
    • Cash flow based
    • Market independent
    • Self sufficient
    • flexibility
  82. Cons for DCF
    • Deoendence on financial projections
    • sensitivity to assumptions
    • terminal value
    • assumes constant capital structure
  83. Leading indicators
    Bond yields, Weekly average jobless claims, stock market indices, building permits, M2 money supply, inventory levels, manufacturing orders
  84. Lagging indicators
    Unemployment numbers, corporate profits, interest rates
  85. Coincident indicators
    GDP,Employment, personal income, industrial productions, retail sales, consumer spending, manufacturing sales, inventory / sales ratio,
  86. Net Debt
    Total debt - cash
  87. A typical M&A sales period
    3-6 months
  88. Form S-1
    Used for SEC registration of any new issued securities
  89. Form S-3
    Short form for S-1 and used only by qualified companies to file for securities issued
  90. Gramm Leach Bliley Act
    Puts all backs under SEC registration for security trading, except credit unions
  91. NRSRO
    Nationally recognized statistical rating organizations such as Moody's, S&P
  92. Statuary disqualification
    Any felony or misdemeanor involving securities within 10 years
  93. Long term rates
    Long term rates are more volatile than short term rates
  94. ROIC - return on invested capital
  95. Eurodollar bonds
    • Issued outside of the USA
    • Not subject to SEC registration
  96. For registration how many years of audited balance sheet required
    Two years
  97. Enterprise Value / Capacity
    Who uses it
    Natural resource companies, for production capacities
  98. Flipping
    Selling new offerings immediately
  99. Third Market
    Refers to OTC, negotiated price trading of exchange listed stocks
  100. Anti-manipulation rules for exempt securities
    They are in Act of 1934
  101. Anti-Fraud Provisions
    Securities Exchange Act of 1934
  102. Securities act of 1934
    Applies to securities subject to registration requirements as well as those that are exempt, such as government and municipal securities
  103. Wash Sale
    • Price manipulations by purchase and sale without changing ownership -
    • An illegal transaction an investor makes by simultaneously buying and selling a security through two different brokers, thereby creating the illusion of activity. Investors do this to try and recognize a tax loss without actually changing their position.
  104. Matched Orders
    Two people acting in collusion
  105. Pool Activity
    Group of people involved in Matched Orders
  106. Painting the Tape
    An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.
  107. Pegging or Price Fixing
    When prices are set artificially at certain level
  108. Statue of limitations
    A suit must be brought against alleged bookstore with 3 year of the activity and within 1 year of discovery
  109. Chinese Walls / information barriers
    Ethical barrier, Prevention of free flow of restricted, non-public information
  110. Penalties for insider trading
    • Civil penalties: treble damage, up to 3 times profit,
    • Criminal penalties for willful violation: up to $5M and 20 yr. jail
  111. Review and reporting of insider trading violations
    By 15th of the month following the quarter the trading took place
  112. Bank Secrecy Act (BSA)
    Adopted in 1970, provides basic framework for anti-money laundering (AML) obligations
  113. Financial Crime Enforcement Network
    Administrator of BSA, receives various forms from banks for AML
  114. Currency Transaction Reports CTR
    Banks must file CTRs if cash deposits over $10K on same day; must be filed within 15 days
  115. Financial Crimes Enforcement Network
    FinCEN, bureau within treasury department
  116. Suspicious Activity Report SAR
    Must be filed with FinCEN within 30 days, activities suspicious of money laundering
  117. USA Patriot Act
    Strengthened the BSA for AML, anti-money laundering obligations
  118. Patriot Act requirements
    AML compliance programs, customer identification programs, mandatory info sharing with Feds,
  119. Gifts and gratuities according to SRO rules
    $100 limit per year
  120. Manipulative and fraudulent activities
    • Pegging
    • Wash sale
    • Matched purchases
  121. Assumptions included in captions on pro forma financial statements
    Must be in font as large as the rest of the statement
  122. National Arbitrations and Mediation Committee (NAMC)
    25 neutral individuals
  123. Operating income
  124. EBITDA
    Operating Income + D&A


    EBIT + D&A
  125. Primary offering
    Transaction involving sale of new securities from an issuer to an investor
  126. Typical auction M&A process takes
    90-180 days
  127. Types of M&A processes
    • Auction
    • Negotiated sale
  128. Broker dealer reports resignation of representative to FINRA within how many days?
    30 days
  129. SDC Platinum
    M&A database
  130. Preferred stocks
    Usually receives higher dividends, but usually does not have voting rights, but senior to common stocks at liquidation
  131. IPO Calendar
    Investment banker checks IPO calendar to evaluate competition and supply
  132. Treasury bills are quoted
    Annualized discount percentage or basis
  133. Treasury Notes and Bonds are quoted in
  134. Statuary disqualifications
    • Barred from securities industry for 10 years,
    • U-4 form must be amended within 10 days
  135. Re-trade
    Bidder re-bids after due diligence at a lower price
  136. Market out clause
    Underwriting agreement clause to cancel a purchase agreement without penalty
  137. Supervisory system requires
    Inspection of OSJ once a yer, and branch offices once every three years
  138. Rights vs warrants
    Rights are short term, allow shareholders to buy below market price, protect against dilution; warrants are long term, generally higher price, used in conjunction with bonds, do not protect shareholders from dilution!
  139. Mediation vs arbitration
    Mediation is voluntary, parties may choose mediator and may stop anytime; arbitration is final and binding, cannot be stopped and appointed by NAMC
  140. Securities Act of 1934
    Regulates and require the registration of exchanges, broker dealers and their representatives and other participants in the secondary market
  141. Securities Act 1933
    Regulate the offer and sale of securities and requires sufficient investor information, thru registration process; focus on Primary market
  142. Designated market makers / specialist
    For NYSE
  143. Market makers facilitate transactions at
  144. Measure of bond's sensitivity to changing interest rates is known as

    The greater the bond's duration, the greater it's sensitivity to movement in interest rates
  145. Direct participation programs
    Typically structure as partnerships to pass revenues and tax deductions directly to limited partners
  146. NAMC
    National arbitration and mediation committee
  147. Numbers of arbitrators
    • <$25k. One arbitrator
    • Between$25k and $100k,one arbitrator unless parties ask for three
    • >$100k three arbitrators unless parties agree to one
  148. Arbitration time line
    All documents in 20 days before hearing; decision within 30 days; awards to be paid within 30 days
  149. U-4 and arbitration
    When you sign U-4, you gives up the right to sue, And use arbitration for almost everything
  150. Bookkeeping And record keeping requirements
    Most Records should be kept for 3 years, some records such as general ledger and customer records must be kept for 6 years
  151. Regulation FD - Fair Disclosure
    Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to [certain enumerated persons], the issuer shall make public disclosure of that information... simultaneously, in the case of an intentional disclosure; and... promptly, in the case of a non-intentional disclosure.
  152. Customer Identification Program
    Verify the identity of all US and non-US customers, as part of AML compliance
  153. Form 8-K
    Under regulation FD, required public disclosure is made by filing 8-K with SEC
  154. Form S-4
    Registration statement used in a merger, acquisition or exchange offer
  155. Form S-8
    Registration statement filed for offering securities to company employees thru employee benefit plan
  156. Form S-11
    Registration statement filed for offering real estate investment companies, including Real Estate investment Trusts (REITs)
  157. Public float
    Common shares held by the public, not by the insiders
  158. Common methods fir valuation in fairness reports
    • DCF
    • Comparable transactions
    • Comparable public companies
    • Unique industry metrics
  159. Disclosure requirements for Fairness opinions FINRA rule 5150
    • Contingent fees,
    • Material relationship within 2 years
    • Independent verification of info,
    • Fairness committee approval,
    • Insider compensation
  160. Fairness committee composition
    Minimum two people who have not been involved in the transaction; independent
  161. Fraud
    Securities act 1933 prohibits fraud in initial sale, while securities act 1934 prohibits in secondary market transactions
  162. OTC BB
    Over the counter Bulletin Board
  163. Third market
    Over the counter, negotiated price trading of exchange traded securities
  164. Fourth market
    Direct trading of large blocks of securities between institutions and/or retail investors; these are traded over ECN, electronic communication networks
  165. Misappropriation Theory
    Those who misappropriate (steal) information from their employers and trade on that information not just their employer's stock but any stock, are guilty of insider trading
  166. Duty of trust
    Applies when two people have history of sharing non-public information in confidence
  167. Registration of business combinations
    • Reclassifications - substitution of one security for another,
    • Merger, acquisitions or consolidation- change of securities into securities of another,
    • Transfer - exchange of assets
  168. Registration of business combinations
    • In most cases, registration is made thru form S-4, and F-4 for foreign companies.
    • However, for all cash transactions, no SEC filing required
  169. Business combinations - all cash transactions
    No SEC filing with S-4 is required, unless the transaction is contingent on shareholders vote
  170. Schedule 14A
    • Proxy statement filed with SEC for tender offers
    • PREM14A - preliminary
    • DEF14A- definitive
  171. PREM14A
    Sent out at least 10 days prior to DEF14A
  172. Chapter 11 automatic stay
    Automatic stay on creditor claims as soon as bankruptcy petition is filed
  173. Chapter 11 final plan
    Some creditors claims paid in full while others may be "impaired", ie paid less than full value
  174. Chapter 11 Cram down
    Once the final plan is approved by 2/3 of dollar amount first class impaired creditors and at least 1/2 of number of claims, then the judge signs off on the plan, remaining creditors have to accept the plan
  175. Chapter 11 and equity holders
    Not always wiped out, but greatly reduced in the reorganization
  176. Chapter 11 DIP financing
    New loans extended to debtor after Chapter 11 filing; new creditors move to the head of the line for debt payment
  177. Chapter 11 DIP
    Deptor in Possession - is a fiduciary capacity and has trustee powers granted by bankruptcy code
  178. Chapter 11 Deptor Conference
    Section 341 meeting, at least one meeting of creditors, where creditors examine debtor's compliance with DiP requirements; US trustee presides over section 341 meeting
  179. Chapter 11 Section 363 acquisitions
    Prospective acquirer buys the debt instruments of the distressed company; after filing for Chapter 11, DIP signs agreement with acquirer; acquirer signs Asset PurchaseAgreement (APA),then makes aPre-emptive bid to acquire; agreement may include "stalking horse" provisions
  180. Chapter 11 Stalking Horse provisions
    • Break up fee,
    • Accelerate deadline for submitting bids,
    • Reimbursement for DD for stalking horse bid,
    • Additional restrictions or requirements on outside bidders,
  181. Chapter 11 - section 363 acquisition
    Stalking horse bid short circuits and accelerates the bankruptcy process
  182. Call Protection and call premium
    Certain restrictions on voluntary prepayments f bank debt or redemption of bonds, during defined time period; may prevent prepayments or require a substantial fee (call premium)
  183. Financial maintenance covenant
    Requires the borrower to maintain it's credit profile in accordance with financial projections it presents to lenders during syndication; tested on a quarterly basis
  184. Contractual subordination
    Priority status of of debt instruments at a legal entity
  185. Acceleration
    Lender's right to have the principal due immediately; after an event of default has occurred, lenders have the right to accelerate their debt and require immediate payment
  186. FINRA
    • Financial Industry Regulatory Authority
    • Self Regulatory Organization (SRO)
    • Certain regulatory authority is delegated by SEC to FINRA
  187. Blue sky laws
    Many states also regulate the securities business under separate state securities laws, called blue sky laws
  188. FINRA's chief role
    Protect the investors by maintaining fairness in the US capital markets
  189. FINRA roles
    • Registering and educating industry participants,
    • Writing rules and enforcing those res and the rules of SEC,
    • Examining firms for regulatory compliance,
    • Administering dispute resolution ,
    • Performing market regulations for various exchanges such as NASDAQ, American stock exchange
  190. SIPC registration
    • Securities Investor Protection Corporation
    • Created by Congress
    • Funded by member assessments to protect the clients of brokerage firms that are forced into bankruptcy
  191. SIPC provides
    Bankrupt brokerage firm clients coverage up to $500k cash and securities, but cash us limited to $250k
  192. Registration of broker dealer
    • Broker dealer must register with SEC and also become a FINRA member for further regulatory insight.
    • Firm files New Member Agreement and form BD
  193. U-4 form
    Uniform Application, for Associated Persons application after the firms application has been approved
  194. U-4 form requires
    Contains personal information about each broker, including verification of employment for the last 3 years
  195. Broker dealer firm must have
    At least 2 principals and at least associate themselves with financial and operations Principal
  196. Qualification exams
    If you fail, you have to wait30 days before taking it again. If failed 3 times, need to wait 180 days
  197. Termination of registration for individuals
    If an individual leaves broker dealer and does get sponsored thru another firm for 2 years, his registration is terminated; qualifying exams must be passed again
  198. Amended U-4 forms
    • Updates on individual
    • Must be filed within 30 days of the event; statuary disqualification must be reported with 10 days.
  199. Types of organizations
    • Subchapter C corp
    • Subchapter S corp
    • Limited Liability companies
    • Limited Partnerships
    • Trusts
    • Master Limited Partnerships
    • Real Estate Investment Trusts
    • Hedge Funds
    • Private Equity Funds
  200. Major diff between C corp and S corp
    S corp can make a selection to avoid double taxation
  201. Qualifications for S corp
    • Domestic only
    • No more than 100 shareholders
    • All shareholders are individuals
    • One class of stock
  202. How is the LLC governed
    With the use of anOperating agreement
  203. LLC may choose to be taxed as
    • Partnership,
    • Sole proprietorship,
    • C corp,
    • S Corp
  204. Limited partnerships are authorized under the state laws and follow
    RULPA, revised uniform limited partnership act
  205. Limited Partnerships have
    • General Partners (unlimited liability) and
    • Limited Partners (limited liability)
  206. Accredited Investors
    • Defined by SEC Regulation D:
    • - director, partner of officer of the issuer
    • - individual with net assets more than $1m inc spouse
    • - an individual with $200k income in last 2 yrs, or Joint incime of $300k in last 2 yrs, with exoectation to Continue
    • - a trust formed not just to acquire the stock, with assets > $5m
  207. Master Limited Partnerships MLP
    Limited partnerships offered to public thru exchanges, no double taxing;
  208. Real Estate Investment Trusts
    • 75% of total assets in real estate
    • 75% gross income from real
    • estate
    • 90% of taxable income must be distributed
  209. Small Business Administration SBA loans
    • 7a loans - for new business purchases
    • VC program loans -for small businesses
  210. Rights offering
    Giving existing shareholders right to acquire additional shares, proportionate to their existing shares at a discounted price
  211. Private placement
    Sold to accredited investors as equity, debt, preferred or convertables
  212. Private Investment in Public Equity PIPE
    • Private placement by public companies to investment funds and accredited investors
    • Securities are restricted, since they don't have to be registered to SEC
    • PIPE investors also receive warrants and get stocks at discount
  213. Forward triangular merger
    If at least 50% paid in stock, seller is taxed only for the cash amoung
  214. Reverse triangular merger
    If at least 80% is paid in stock, seller is taxed on cash amount
  215. Reverse takeover
    A private company buys a public company, mostly a friendly takeover
  216. Leveraged Buyouts (LBOs)
    Public company or parts of it are acquired by investors using borrowed funds
  217. Individual investors
    • High Net Worth - exceeding $1-2m
    • Very high net worth - between 5 and 50 m
    • Ultra high net worth- exceeding $50m
  218. Conduit investors
    Mutual funds, ETFs, hedge funds, private equity funds, broker dealers
  219. Qualified Institutional Buyers QIBs
    • Investors with more than $100m holdings
    • Can participate in restricted unregistered security offerings under Rule 144A
  220. Income Statement
    Also called P&L
    • Reports revenues, expenses and net profits for a year or quarter
    • Drives Earnings per Share EPS calculations
    • DRI
  221. Balance Sheet
    • Reports assets, liabilities and shareholders equity at a particular time
    • Drives company's book value per share
  222. Cash flow statement
    • Includes cash generated or used by
    • - operating activities,
    • - investing activities and
    • - financing activities
    • During a particular period
  223. International Financial Reporting Standards IFRS
    Replacing GAAT generally accepted account principles
  224. Depreciation and amortization
    Non cash accounting expenses usually reported under SG&A which is part of Operating Expenses
  225. Depreciation
    Portion of the tangible property or equipment claimed as an expense during a period due to decline in value or wear & tear
  226. Amortization
    Non-cash expense claimed for intangible assets, such as goodwill, IPR, etc
  227. EBIT
    Earnings before interest and tax
    • Operating profit
    • Operating income
    • Income from operations
  228. Operating Leverage
    • Fixed cost / (fixed cost+variable cost)
    • Fixed cost is SG&A + other expenses
    • Variable cost is COGS
  229. Balance Sheet
    current assets=liabilities+shareholder value

    Shareholder value is also net worth or book value of the company
  230. Current assets
    = cash + those than can be converted to cash within a year, account receivables, inventory, supplies,Pre-paid expenses
  231. Non current assets
    • Property plant and equipment PPE
    • Intangibles such as goodwill, deferred tax assets, long term investments
  232. Goodwill
    Created when one company acquires another company for a price greater than the book value
  233. Other intangibles
    • Copyrights
    • Patents
    • Trademarks
  234. Deferred tax assets
    Created when a company depreciates property faster on SEC filing than they do on tax returns; eventually decays to zero due to paying less taxes in the future
  235. Current liabilities
    • Payments,debt, obligations due within 1 year
    • Wages, accounts payable,notes, interest, taxes
  236. Private placements
    • Exempt transactions
    • Outside the scope of SEC registrations
  237. Private placements
    • Sophisticated investors
    • Agree not to sell to public
    • 2 yr holding period
  238. Private placement memorandum PPM
    Based on company business plan
  239. Placement Agent
    • Help issuers in all aspects of the fundraising
    • Compensation is % of funds raised
  240. Subscription agreement
    • Sales contract between investor and the company raising funds as part of private placement
    • Must include a investor suitability questionnaire
  241. Member private offering
    • Fundraising by FINRA member company,
    • Subject to rule 5122
    • Must file offering docs with FINRA, but no requirement to wait
  242. Term sheet
    Outline of the material provision and conditions of an offering
  243. IPO types of offering
    • IPO or additional issue
    • Primary offering, or Secondary offering or
    • Split offering
  244. Types of underwriter commitments
    • Firm commitment - purchase all shares
    • Standby commitment- type of firm commitment for existing shareholders, also called rights offering
    • Best efforts - attempts to sell all but no obligations,usually for higher risk stocks
    • All or None - if not all shares are sold, offering is cancelled
    • Mini-Max - similar to all or none
  245. Issuer chooses underwriter using two methods:
    • - Negotiated process / bake off
    • - competitive bid with seal bids from underwriters
  246. Spread between the purchase price and public offering price for IPO
    • Compensation for the underwriter
    • - manager's fee 10-20%
    • - underwriting fee 20-30%
    • -selling concessions 50-60%
  247. Agreement among underwriters AAU
    • Appoints originating underwriter as the managing underwriter
    • Assigns proportional liabilities among underwriters
    • Authorizes the manger TI allocate a portion of the issue to a selling group
  248. Selling group
    • Broker dealers tasked with selling the IPO
    • Selected Dealer Agreement
    • No financial responsibility for unused portion
  249. Full takedown or underwriting concession
    Underwriting fee + selling concession
  250. Selected dealer agreement
    • Stipulates the terms for selling group
    • Members could be non - FINRA firms such as banks etc
  251. Spinning
    Illegal act of allocating some of the IPO shares to executives of companies as favors to get their future business
  252. Securities taken in trade
    • Buying other shares from an investor so that he can invest in the IPO shares
    • Only legal if shares purchased at market price
  253. Pot arrangements at IPO
    • - fixed pot arrangement - predetermined and fixed compensation among underwriters
    • - jump ball pot arrangement- credits go to those with first come first served,each underwriter competes
  254. Callable Bonds
    Issuer has the right to redeem it prior to it's maturity date; includes a call premium, maybe called when interest rates are lower; may include a call protection which a period of time for no calls; incurs reinvestment risk
  255. Reinvestment risk
    When an issuer calls a callable bond, the investor faces reinvesting challenge since interest rates are lower
  256. Callable bond types
  257. Capital surplus
    • Also called additional paid in capital,
    • Capital raised in excess of par value of the stock
  258. Stock re purchase activity
    Considered financing activity in the cash-flow statement
  259. Equity Value
    Share price * fully diluted shares outstanding
  260. Fully diluted shares outstanding
    = basic shares outstanding + exercisable "in the money" stock options and warrants + "in the money" convertible securities
  261. Preliminary Proxy statement must be filed at least
    10 days prior to the filing of definitive Proxy being sent to shareholders
  262. Definite Proxy DEF14A or DEFM14A must be sent to shareholders at least
    20 days before the shareholder mtg is held
  263. DEF14A and DEFM14A
    Definitive proxy statements files with SEC and set to shareholders prior to shareholder meetings
  264. Financial maintenance covenant requires
    Borrower to maintain its credit profile in accordance with financial projections it presents to lenders during syndication
  265. OSJ offices of supervisory jurisdiction
    Main office and regional offices, at least 1 registered principal per OSJ
  266. Supervisory visits
    Branch offices that supervise non- branch offices once a year, but other branch offices once 3 years
  267. Securities act of 1934
    regulates and requires the registrations of exchanges, broker-dealers and their representatives, and other participants in the secondary market
  268. Duration
    Measures bonds sensitivity to changes in interest rates
  269. Regulation M
    Enacted to prevent manipulative conduct by person with an interest in the outcome of an offering of securities, including underwriters, iƟsizde, And selling Security holders
  270. Regulation M rules part 1
    • Rule 101 - for distribution participants eg underwriters
    • Rule 102- for issuers and selling security holders,
  271. ADTV
    Average Daily Trading volume
  272. Regulation S
    • Confirms that securities offered offshore are not subject to registration requirements;
    • Can be resold to a US person only after 1 yr for equities and after 40 days for debt securities
  273. Rule 144
    Defines how the securities acquired thru an exempt transaction or restricted securities can be re-sold
  274. Restricted securities
    Those acquired in unregistered private sales, eg private placements, Reg D offerings, Reg S offerings, employee stock benefits, etc
  275. Holding period for restricted securities
    Min 6 months for companies subject to reporting requirements, 1 year for others
  276. Control securities
    Securities held by corporate insiders, also called affiliates, ie officers of the company,member of the board, individuals owning at least 10% of the shares
  277. An insider can sell during a 3-month period, no more than
    • Greater of
    • 1) 1% of the outstanding shares
    • 2) average weekly trading volume during the last 4 weeks
  278. Form 144
    Used by affiliates / insiders yo indicate to give notice to sell control stocks
  279. Equity research restrictions
    Prohibit from attending roadshows, communicating with customers in the presence of investment bankers
  280. Regulation M
    To prevent manipulative conduct during the offering of securities
  281. Regulation M Rule 101
    Restrict the activities by underwrites and other persons who are participating in the distribution of the securities
  282. Regulation M Rule 102
    Restrict the activities of issuer or selling shareholders
  283. Regulation M Rule 103
    • Allows broker dealers to engage in passive market making transactions in Nasdaq securities
    • Can bid at most the highest independent bid, also have volume limitations during restricted period
  284. Reg M Rule 103 volume restrictions for passive market making
    Can not exceed 30% of the market makers daily trading volume during 2 month prior
  285. Reg M rule 104
    Rules for stabilization of the security during an offering, also involves penalty bids
  286. Purpose of stabilization
    To prevent a decline in the market price, but not to manipulate a higher price
  287. Stabilization
    Must be planed ahead and announced ahead
  288. Reg M Rule 104 Penalty Bids
    Imposed by lead manager to syndicate member if securities allotted to him are 'flipped'
  289. Reg M Rule 105
    Prevents Short selling during restricted period for most of the transactions
  290. Direct participation Programs
    Can spend only up to 15% on organization and offering (O&O) expenses
  291. Continuing education has two mandatory programs
    • Regulatory element and
    • Firm element
  292. Regulatory element requirement
    All registered individuals to take within 120 days of the 2nd anniversary of registration and every 3 years thereafter
  293. Regulatory element content
    • Compliance
    • Regulatory standard
    • Ethical standards
    • Sales practices
    • Supervisory standards
  294. CE inactive
    Individuals who do not satisfy Regulatory Element requirement become CE Inactive, can stay up to 2 yrs as CE inactive; beyond that must be terminated and must pass exams to qualify.
  295. Firm Element
    Broker dealer establishes a formal training program to keep employees up to date on industry
  296. Types of yield curves
    • Normal - longer term bonds have higher yield
    • Inverted - longer term bonds have lower yield
    • Humped / flat - long and short term bonds have similar yields
  297. Cooling off period
    The time between the registration of an offering until SEC declares the registration effective
  298. Cooling off period activities
    • Limited communication and promotion,
    • Preliminary prospectus / red herring
    • Roadshow
    • Free Writing Prospectus
  299. Red Herring
    Preliminary prospectus
  300. Three periods re registration of an offering
    • 1. Pre-filing period
    • 2. Cooling-off period
    • 3. Post effective period
  301. MAC
    Material Adverse Change
  302. Selected dealer agreement
    Stipulates the terms for the selling group who is allocated portion of the issue, but take no financial responsibility for unsold portion
  303. Schedule13D
    Filed with SEC for acquiring 5% of shares of public company,within 10 days
  304. Firm element records are kept for
    3 years
  305. Gun jumping example
    CEO Making positive predictions during the quiet period
  306. Reg A
    Exempt securities offered less than $5M in 12 months; simple procedure, offering circular, no need for audited financials
  307. Statutory Voting
    Vote all your shares for each director
  308. Cumulative voting
    If two directors are to be elected, you have two times your shares to allocate whichever director you want or split it
  309. Investment act of 1940 covers all investment firms except
    Hedge funds
  310. Assets=
    Liabilities + Shareholders equity
  311. Reg D
    Private Placement
  312. Rule 147
    Intrastate offering
  313. Former affiliate of issuer sell shares under Rule 144
    If not affiliated for 3 months and if held stock for 1 year
  314. Schedule 13D
    Filing with SEC if acquiring 5% of public company within 10 days
  315. Under Reg D three rules
    • Rule 504 - up to $1m
    • Rule 505 - up to$5m
    • Rule 506 - more than $5m
  316. Reg D rules 505 and 506 permits
    Sale to unlimited number of accredited investors and up to 35 non-accredited investors
  317. Accredited investor
    • - person with net worth more than $1m
    • - person income exceeding $200k per year or $300k with spouse
    • - banks, insurance, investment companies
    • - officers of issuer
  318. Under Reg D rule 506 all non accredited investors need to be
    Sophisticated investors who possess sufficient knowledge and experience in financial and business matters
  319. Individuals investors that purchase securities under Reg D rules 504 and 505 do not need to be
    Sophisticated investors
  320. Under Reg D rule 506, non-accredited investors can use the services of
    Purchaser representatives
  321. Purchaser representatives under Reg D rule 506 must be
    • Not associated with issuers,
    • Subject to conflict of interest disclosures,
    • Must have written documentation between investor and purchaser rep
  322. Categories of issuers
    • - well known seasoned issuers
    • - seasoned issuers
    • - unseasoned issuers
    • - ineligible issuers
    • - non reporting issuers
  323. Unseasoned issuers
    Subject to SEC reporting but cannot use S-3
  324. Cost of equity
    =risk free rate + beta*risk premium
  325. Risk premium
    =S&P rate - risk free rate
  326. WACC =
    • After tax cost of debt * % of debt in cap structure
    • + cost of equity * % of equity in cap structure
  327. After tax cost of debt=
    Debt rate * (1 - effective tax rate)
  328. Shelf registration
    Allows issuer to preregister in order to sell as soon as the market is favorable
  329. Automatic shelf registration ASR
    WKSIs can file shelf registration that becomes automatically effective without prior review; this would be valid for 3 years; during this time, the issuer can 'refresh'
  330. Non automatic shelf registration
    Valid for 3 years and 180 days; issuer can re-register which starts the clock again
  331. Auditor requirements in case of illegal act
    • First inform audit committee or board of directors
    • If no remedy, issue report to board
    • Board must send the report to SEC in 1 day and copy auditor
    • If board does not act, auditor resigns and sends report to SEC
  332. Communications not deemed a prospectus
    • Implicit exception: oral communications
    • Explicit exception: written material sent in conjunction with the prospectus
  333. Free writing prospectus FWP
    Permitted only after registration, except WKSIs can send FWP any time, ie before or after registration
  334. FWP needs to have a disclosure
    For Non-WKSIs stating that they shd read the prospectus that was filed with registration
  335. Rule 144A
    Permits to trade unregistered securities between parties as long as they are QIBs, qualified institutional buyers
  336. QIBs
    Institutions with over $100m in portfolio, or brisker dealers that have $10m portfolio
  337. NASDAQ portal market
    For trading rule 144a transactions only between QIBs
  338. Piggyback registration rights
    When issuer registers their previously unregistered equities, piggyback registration allows investors to demand to have their equity to be registered as part of the issuers fegsitration