A rule that stipulates the order of payment - creditors before shareholders - in the event of liquidation. The absolute priority rule is used in bankruptcies to decide what portion of payment will be received by which participants. Debts to creditors will be paid first and shareholders (partial owners) divide what remains. Regarding the estate of a deceased person, the absolute priority rule will ensure payment of outstanding debts before the distribution to beneficiaries. Also known as "liquidation preference". Taobiz explains Absolute Priority Absolute priority specifies the pecking order. Senior creditors always get first grabs at the proceeds from liquidation, and shareholders are the last to get paid. This rule provides a degree of protection to creditors in the event of insolvency or death. The division of benefits (cash) is not always the result of a bankruptcy. It can also occur due to the liquidation of assets in order to pay down a company's liabilities. In estate cases if the resources of the estate are insufficient to pay off the debts, assets will need to be liquidated to handle the obligations.
An accounting term referring to the balance sheet item that accounts for dividends that have been declared but not yet paid to shareholders. Accrued dividends are booked as a liability from the declaration date and remain as such until the dividend payment date. Accrued dividends should not be confused with accumulated dividends, which refer to dividends due to holders of cumulative preferred stock. Taobiz explains Accrued Dividend There are no accounting rules that mandate a time frame in which the accrued dividend entry should be recorded, though most companies usually book it a few weeks before the payment date. After the dividend is declared, it becomes property of the record-date shareholder and is considered separate from the stock. This separation allows the shareholders to become creditors of the company, due their dividend payment, should a merger or some other corporate action occur.
A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. Taobiz explains Accounts Payable Turnover Ratio The measure shows investors how many times per period the company pays its average payable amount. For example, if the company makes $100 million in purchases from suppliers in a year and at any given point holds an average accounts payable of $20 million, the accounts payable turnover ratio for the period is 5 ($100 million/$20 million). If the turnover ratio is falling from one period to another, this is a sign that the company is taking longer to pay off its suppliers than it was before. The opposite is true when the turnover ratio is increasing, which means that the company is paying of suppliers at a faster rate.
A type of trading in which a trader accommodates another by entering into a non-competitive purchase or sale order. An accommodation trade is often executed when two traders are participating in illegal trading. Taobiz explains Accommodation Trading An accommodation trade could occur when two traders agree to exchange a stock for a price well below the market value, allowing the seller to realize a large capital loss on the shares. For example, suppose that Bill purchased stock in Company XYZ at $55 per share. With tax season coming soon, Bill decides to sell the stock to Joe for $45, even though the shares are currently trading at $60. Bill realizes a capital loss of $10 per share, which he can use to lower the taxes paid on any capital gains on other investments. After the taxes are filed, Joe sells the stock back to Bill at $45. This trade, also known as a wash sale, allows Bill to cheat the tax system, while never actually losing any value on the stock.
A clause included in certain debt securities and swap agreements stating that the immediate collection of payment and termination of contract will take place should any number of clauses being violated by the borrower including default or a downgrade of debt. Also referred to as "acceleration clause." Taobiz explains Acceleration Covenant This covenant helps to protect parties that extend financing to businesses in need of capital. Under an acceleration covenant, the borrowing party must maintain a specified credit rating in order to prevent termination of the contract and immediate repayment.
A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company. The shares are returned to the client through purchases in the open market, often purchased over a period that can range from one day to several months. Taobiz explains Accelerated Share Repurchase - ASR Accelerated share repurchases allow corporations to transfer the risk of the stock buyback to the investment bank in return for a premium. The corporation is therefore able to immediately transfer a predetermined amount of money to the investment bank in return for its shares of stock. ASRs are often used to buy shares back at a faster pace and reduce the amount of shares outstanding right away.
A type of index fund where a fund manager bases the fund's initial investment proportions according to the benchmark index in which the manager is attempting to track, and then proceeds to add what he/she believes to be higher performing stocks that are unrelated to underlying index. The fund manager will then actively manage the composition of these non-benchmark stocks in order to earn yields that exceed the benchmark index. Taobiz explains Active Index Fund A fund manager that attempts to make an active index fund version of the Standard & Poor's 500 Index (S&P 500) would buy and periodically rebalance all the stocks to match the proportions found in the actual S&P 500. In addition, the manager will add stocks they believe will have a strong performance. For example, if the manager believes that the semiconductors will be hot during the subsequent quarter; more semiconductor stocks would be added to the portfolio. While it is possible that some fund managers may be able to significantly beat the underlying benchmark index by using strategies, such as market timing, this is far from guaranteed. Furthermore, the active management aspect of the fund will likely incur higher expenses, which could eat away at some and perhaps all of the extra returns earned by active management.
A loan given to a company to purchase a specific asset or to be used for purposes that are laid out before the loan is granted. The acquisition loan is typically only able to be used for a short window of time, and only for specific purposes. once repaid, funds available through an acquisition loan cannot be reborrowed as with a revolving line of credit at a bank. Taobiz explains Acquisition Loan Acquisition loans are sought when a company wants to complete an acquisition for an asset but doesn't have enough liquid capital to do so. The company may be able to get more favorable terms on an acquisition loan because the assets being purchased have a tangible value, as opposed to capital being used to fund daily operations or release a new product line.
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