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39 Cards in this Set
- Front
- Back
Capital structure
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A corporations mix of long-term debt & equity.
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Equity interest
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The right to whatever profits remain after all other expenses and creditors have been paid.
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Common stock shares
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First security issues by a corporation and the last retired.
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Common shareholders
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Voting owners of the company. Control over companys management.
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Preferred shareholders
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Have priority over common shareholders.
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Debt capital
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Raised through the sale of bonds in the capital market.
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Financial leverage
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The use of fixed cost funds (debt) to increase returns to shareholders.
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Financial leverage analysis
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Technique used for comparing earnings per share (EPS) under alternate capitalization plans with varying levels of debt and equity.
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EBIT
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Earnings before interest & tax.
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Tax shield
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The amount of income taxes saved due to a company raising capital using debt rather than equity.
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Return on Equity
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Net income / equity
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Earnings per share
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Net income / Common shares outstanding
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Cost of financial distress
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The difference between what the shareholders would receive with and without bankruptcy. Since bankruptcy involves legal and administrative costs and has the potential of selling assets at less than their true economic value.
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Insurer cash flow
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-Policyholders surplus-Contributed capital plus earnings retained in the business.
-Policyholders supplied funds-Reserves for losses, LAE's and unearned premiums. |
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Insurance leverage
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Insurance exposure x (reserves / premiums written)
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Financial leverage
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The use of fixed cost funds (debt) to increase returns to shareholders.
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Cost of insurance operations funds
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K10 = [(1 - T) x U] / (Lr + Pr)
K10 = cost of capital from insurer operations T = tax rate U = underwriting loss Lr = loss and LAE reserves Pr = unearned premium reserves |
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Limitation of insurance leverage
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Statutory accounting. Since it requires immediate recognition of policy acquisition costs combined with the deferral of revenues. This reduces policyholders surplus.
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Cost of capital
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The opportunity cost of funds provided by investors.
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Cost of equity
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The rate of return required to compensate a companys common shareholders for the use of their capital.
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Discounted cash flow model (DCF)
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Values an asset as the present value of all future cash flows from that asset in perpetuity.
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DCF calculation
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Ke = [(d / p) x (1 + g)] = g
d = last annual dividend p = current share price g = expected growth rate |
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Capital asset pricing model (CAPM)
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Method of pricing securities based on the relationship of risk and return.
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CAPM calculation
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Ke = rt + B (rm - rt)
B = Beta of securit rm = Expected return on teh market rt = Risk-free rate |
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Unsystematic risk (specific risk)
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Risk that arises from factors that are unique to a particular investment.
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Systematic risk
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The potential for a major disruption in the function of an entire market or financial system.
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Cost of debt
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Kd = (risk free rate of return rf + risk premum) x (1 - tax rate)
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Cost of preferred stock
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Kps = D / Pp
Pp = Markt price of one share of preferred stock D = Dollar amount of dividend paid on each share Kps = Cost of preferred stock capital |
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Weighted average cost of capital (WACC)
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The average of teh cost of equity and the cost of debt calculated according to the proportion of the whole invested capital that each represents.
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WACC calculation
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(Cost of equity x percentage equity) + (cost of debt x percentage debt)
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Capital adequacy
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Requires insurer to have at least $1 of surplus for every $3 of written premium.
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Underwriting risk
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A measure of the loss votality of the types of insurance sold by an insurer.
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Risk-based capital (RBC)
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Amount of capital an insurer needs to support its operations, given the insurers risk circumstances.
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RBC risk types
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-Asset risk
-Credit risk -Underwriting risk |
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RBC action levels
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-No action (200% +)
-Company action level (150-200%) -Regulatory action level (100-150%) -Authorized control level (70-100%) -Mandatory control level (below 70%) |
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Economic capital
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A form of regulatory capital
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Market value surplus (MVS) of insurer
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Fair value of assets - fair value of liabilities.
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Enterprise risk management
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An approach to managing all of an organizations key business risks and opportunities with the intent of maximizing shareholder value.
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Solvency II
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A fundamental review of the capitalization of insurers in the European Union
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