The date of payment is the day that a company actually pays its dividends. Remember on the date of declaration, the board of directors only declares or decides to issue a dividend. The company doesn’t actually pay the dividend on that day. The dividend isn’t actually paid until the date of payment. Sounds pretty logical right? The time between the date a dividend is declared and actually paid could be as little as a week or as long as a few months.
Explanation :
After dividends are declared, the company has to record all of the shareholders that will get the dividend. This is called the date of record. Soon after the date of record, usually within a few days, the company issues the dividend payments to the shareholders in forms of checks, direct deposits, and wire transfers. The main reason for the delay in payment is for the company to organize its funds, record the current shareholders, and manage the logistics of sending out thousands or even millions of payments. A payment date, also known as the pay or payable date, is the day on which a declared stock dividend is scheduled to be paid to eligible investors. This date can be up to a month after the ex-dividend date. Note that the stock price may fall on the payment date to reflect the dividend payment even if it has not been actually credited to investors at that point in time.
In a nutshell:
- The payment date is the actual day when a company pays its eligible shareholders dividends.
- The payment date will often be a few weeks after the ex-dividend date has occurred.
- Investors and analysts may watch the stock price on the payment date to see if the cash disbursal has a negative impact on the company’s perceived financial stability.
A debtor is an individual or business that owes money to another individual or business. Debt is one of the most common forms of financing businesses use to grow and maintain their operations. Companies can issue debt to the public in the form of bonds or they can acquire debt from a bank or loan institution.
Explanation:
Officer loans are also a common form of debt in smaller companies. It’s not uncommon for a family run business to borrow money from one of the officers instead of going to the bank for financing. As with all debt, companies must analyze their debt to equity ratio and quick ratio to properly manage their debt level. Some companies borrow too much money and can’t afford the interest payments over time. It’s important for businesses to examine these ratios before accepting another loan. If a company’s debt ratios are too high, it might be in its best interest to finance its expansion or operations using equity financing.
In a nutshell:
- Debtors are individuals or businesses that owe money, whether to banks or other individuals.
- Debtors are often called borrowers if the money owed is to a bank or financial institution, however, they are called issuers if the debt is in the form of securities.
- Debtors cannot go to jail for not paying consumer debt (e.g. credit cards).
- The Fair Debt Collection Practices Act (FDCPA) prevents bill collectors from threatening debtors with jail time, but courts can send debtors to jail for unpaid taxes or child support.
- Creditors may have other recourse if there’s collateral, such as repossession, or they can take debtors to court for garnishments.
A debit is an accounting term for an entry made on the left side of an account. Many times debit is abbreviated as Dr.The double entry accounting system is based on the concept that total debits always equal total credits.
Explanation :
A debit does not mean an increase or decrease in an account. Many accounting students make this mistake. A debit is always an entry on the left side of an account. Depending on the account, a debit can increase or decrease the account. Accounts that have debit or left balances include assets, expenses, and some equity accounts. This means that a debit recorded in an asset account would increase the asset account. Conversely, liabilities and revenue accounts have credit or right balances. A debit recorded in a revenue account would decrease the revenue account.
In a nutshell:
- A debit is an accounting entry that creates a decrease in liabilities or an increase in assets.
- In double-entry bookkeeping, all debits must be offset with corresponding credits in their T-accounts.
- On a balance sheet, positive values for assets and expenses are debited, and negative balances are credited.
Electronic funds transfer or EFT is common with businesses and with individuals. Electronic funds transfer is the electronic communication used to transfer cash from one bank account to another. EFTs don’t require paper or checks to transfer cash between accounts. Banks can simply make a journal entry and the cash is taken from one account and placed in another.
Explanation :
EFTs have been increasingly popular with businesses because of the convenience and low costs. It can cost banks as much as 50 cents to process a single check, but the same banks can process an EFT for almost nothing. Plus, this saves the business from buying checks, mailing checks, and safeguarding checks from theft. Businesses can simply call their banks or log on to their online accounts to transfer money to another account.
Example :
The most common business transactions that are made by electronic funds transfer are payroll, utilities, rent, and insurance. This makes sense. Each one of these expenses is regular and consistent. You may have noticed this with your employer. Rather than getting a paycheck every week or two, now your pay is directly deposited in your personal bank account. Most employers have moved to a direct deposit electronic funds transfer system for payroll. It is convenient for both the employer and the employee. It also saves the employer time and the uncertainty of outstanding checks. Once an EFT is initiated, the bank immediately withdraws the money from the employer’s account and deposits the cash in the employee’s account. There is no flow time like there is with checks.
In a nutshell :
- Electronic fund transfers are transactions that use computers, phones, or magnetic strips to authorize a financial institution to credit or debit a customer’s account. …
- The EFTA outlines requirements for banking institutions and consumers to follow when errors occur.
The intrinsic value of security is the present value of the expected cash flows that the investment will generate in the future. The market reflects all newly available information in the market price so investors can accurately forecast the expected future value.
Explanation :
The efficient market hypothesis (EMH) is an investment theory launched by Eugene Fama, which holds that investors, who buy securities at efficient prices, should be provided with accurate information and should receive a rate of return that implicitly includes the perceived risk of the security. The term “new information” implies information that could not be predicted, because, in this case, it would have been integrated into the market price. In this aspect, securities trade at their fair value protecting investors from buying undervalued stocks or selling overvalued stocks. On the other hand, the only possible way to outperform an efficient market is to accept a higher level of investment risk.
In a nutshell :
- The efficient market hypothesis (EMH) or theory states that share prices reflect all information.
- The EMH hypothesizes that stocks trade at their fair market value on exchanges.
- Proponents of EMH posit that investors benefit from investing in a low-cost, passive portfolio.
- Opponents of EMH believe that it is possible to beat the market and that stocks can deviate from their fair market values.
Effective tax rate is the average percentage that companies and individuals pay in taxes on their taxable income. It’s typically calculated by dividing total taxes paid by the total taxable income. In other words, this is the rate that you are actually paying on your total income, not your marginal or bracket rate.
Explanation :
Often, the effective rate for individuals pertains only to income taxes without including other types of taxes. However, financial analysts include all sorts of taxes when calculating the burden tax on a firm, thus being able to perform a comparison between firms that operate in the same industry. Since the tax code treats individuals and companies differently, each effective tax rate formula is slightly different. Individuals calculate their rate by dividing taxes paid by taxable income. Companies, on the other hand, typically divide their tax expenses by EBIT.
In a nutshell :
- Effective tax rate represents the percentage of their taxable income that individuals pay in taxes.
- For corporations, the effective corporate tax rate is the rate they pay on their pre-tax profits.
- Effective tax rate typically refers only to federal income tax, but it can be computed to reflect an individual’s or a company’s total tax burden.
Effective annual rate is the actual return on a deposit per year after compounding.
Explanation :
The effective annual rate is the actual return on a deposit after taking into account the number of times interest is paid over a period of a year. It is a benchmark to compare deposits taking into account the accumulative power of earning interest on interest.Banks will always offer an interest rate over a specific period making use of a quoted rate. This is the nominal interest rate. The effective rate of return is seldom used in advertising headlines. To do a comparison of returns on these deposits a benchmark period of one year is used. The same concept applies to loans.
In a nutshell :
- The effective annual interest rate is the true interest rate on an investment or loan because it takes into account the effects of compounding.
- The more frequent the compounding periods, the higher the rate.
- A savings account or a loan may be advertised with both a nominal interest rate and an effective annual interest rate.
An economic boom is a period of outstanding economic growth or expansion. This term usually applies to a phase when output increases significantly with positive consequences in employment and prosperity.
Explanation :
The term economic boom generally refers to countries or regions enjoying positive overall performance. It is seen as a phase of optimism, confidence and development. For example, there was a boom in the United States during the 1920s when the Gross National Product grew 40% from 1921 to 1924. There are several conditions that might trigger economic booms, such as consumer and investor confidence and technological advances. In the example mentioned above, higher productivity in the automobile industry thanks to the Ford Company was a key driver for expansion in other industries. In general, these favorable periods bring better living conditions for most of the population. As demand for most products and services increase, loans and credits commonly grow. Firms expand production and hire additional employees. That increasing demand for workers tends to push wages up. However, it is also common that inflation rises as a result of higher demand and the less affluent population groups face difficulties to afford basic goods and services.
In a nutshell :
- A boom illustrates a period of elevated or increased growth within a business, market, industry, or economy.
- A boom lasts over the medium- to long-term and can turn into a bubble, ultimately leading to a bust.
- Booms are often considered bull markets in the stock market, while busts are considered bear markets.
Earnings before Interest, Taxes, Depreciation, Amortization and Restructuring or Rent costs (EBITDAR) is a valuation metric of a firm’s profitability without considering the tax rate and the capital structure of the company.
Explanation :
Financial analysts use this metric to determine the financial health of a company based on its operating cash flows irrespective of depreciation , amortization or any restructuring or rent cost; therefore, this metric has a direct impact on a firm’s and ability to receive a suitable line of credit based on the cash available before all these costs are covered. This ratio is mostly relevant to firms that undergo restructuring, seeking to evaluate the allocation of resources in the firm’s core operations.
Formula :
EBITDAR = EBIT + Interest + Taxes
In a nutshell :
- EBITDAR is a profitability measure, like EBIT or EBITDA, but it’s better for casinos, restaurants, and other companies that have non-recurring or highly variable rent or restructuring costs.
- EBITDAR gives analysts a view of a company’s core operational performance apart from expenses unrelated to operations, such as taxes, rent, restructuring costs, and non-cash expenses.
- Using EBITDAR allows for easier comparison of one firm to another by minimizing unique variables that don’t relate directly to operations.
Earnings before Interest, Taxes, Depreciation, and Amortization, or EBITDA, is a financial metric that measures a firm’s operating profitability.
Explanation :
This metric is a measure of a company’s profitability and strength of operations. In effect, it shows how much cash flow a company generates from its operations. Many investors use this calculation to analyze a company without examining the company’s financing costs, tax burden, and accounting treatments. Since this metric is not a ratio, it’s not used to compare companies of different sizes directly. Also, each company may different greatly from one another when the outside factors are considered. If a company’s EBITDA is negative, it means the business is not profitable even without counting depreciation, amortization, and interest. In other words, it’s in bad shape.
In a nutshell :
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a metric that measures a company’s overall financial performance.
- In the mid-1980s, investors began to use EBITDA to determine if a distressed company would be able to pay back the interest on a leveraged buyout deal.
- EBITDA is now commonly used to compare the financial health of companies and to evaluate firms with different tax rates and depreciation policies.
- Among its drawbacks, EBITDA is not a substitute for analyzing a company’s cash flow and can make a company look like it has more money to make interest payments than it really does.
- EBITDA also ignores the quality of a company’s earnings and can make it look cheaper than it really is.
