Definition of Pro forma statement

Pro forma statement

A financial statement showing the forecast or projected operating results and balance
sheet, as in pro forma income statements, balance sheets, and statements of cash flows.

Pro forma financial statements

Financial statements as adjusted to reflect a projected or planned transaction.

Pro forma (Proforma)

A set of financial statements that incorporates some assumptions, usually
regarding future events. For example, pro forma statements can be constructed that
extend a company’s financial statements through the end of its fiscal year, and
which contain assumptions regarding the final few months of the year, which have
not yet occurred.

After-tax profit margin

The ratio of net income to net sales.

Agency problem

Conflicts of interest among stockholders, bondholders, and managers.

Appropriation request

formal request for funds for capital investment project.

Asset substitution problem

Arises when the stockholders substitute riskier assets for the firm's existing
assets and expropriate value from the debtholders.

Asymmetric information

Information that is known to some people but not to other people.

BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.

Base probability of loss

The probability of not achieving a portfolio expected return.

Before-tax profit margin

The ratio of net income before taxes to net sales.

Book profit

The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.

Call protection

A feature of some callable bonds that establishes an initial period when the bonds may not be
called.

Call provision

An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.

Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s Performance Presentation Standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.

Convention statement

An annual statement filed by a life insurance company in each state where it does
business in compliance with that state's regulations. The statement and supporting documents show, among
other things, the assets, liabilities, and surplus of the reporting company.

Conventional project

A project with a negative initial cash flow (cash outflow), which is expected to be
followed by one or more future positive cash flows (cash inflows).

Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.

Cross-sectional approach

A statistical methodology applied to a set of firms at a particular point in time.

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

Expropriation

The official seizure by a government of private property. Any government has the right to
seize such property, according to international law, if prompt and adequate compensation is given.

Fair price provision

See:appraisal rights.

Good delivery and settlement procedures

Refers to PSA Uniform Practices such as cutoff times on delivery
of securities and notification, allocation, and proper endorsement.

Gross domestic product (GDP)

The market value of goods and services produced over time including the
income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S.
residents and corporations overseas.

Gross national product (GNP)

Measures and economy's total income. It is equal to GDP plus the income
abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents.

Gross profit margin

Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.

Guarantor program

Under the Freddie Mac program, the aggregation by a single issuer (usually an S&L)
for the purpose of forming a qualifying pool to be issued as PCs under the Freddie Mac guarantee.

Income statement (statement of operations)

A statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over some period of time.

Independent project

A project whose acceptance or rejection is independent of the acceptance or rejection of
other projects.

Information asymmetry

A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Information-content effect

The rise in the stock price following the dividend signal.

Informational efficiency

The speed and accuracy with which prices reflect new information.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Insider information

Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.

Integer programming

Variant of linear programming whereby the solution values must be integers.

Investment product line (IPML)

The line of required returns for investment projects as a function of beta
(nondiversifiable risk).

In-house processing float

Refers to the time it takes the receiver of a check to process the payment and
deposit it in a bank for collection.

Linear programming

Technique for finding the maximum value of some equation subject to stated linear constraints.

Mathematical programming

An operations research technique that solves problems in which an optimal
value is sought subject to specified constraints. Mathematical programming models include linear
programming, quadratic programming, and dynamic programming.

Modigliani and Miller Proposition I

A proposition by Modigliani and Miller which states that a firm cannot
change the total value of its outstanding securities by changing its capital structure proportions. Also called
the irrelevance proposition.

Modigliani and Miller Proposition II

A proposition by Modigliani and Miller which states that the cost of
equity is a linear function of the firm's debt-equity-ratio.

Net profit margin

Net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.

Non-reproducible assets

A tangible asset with unique physical properties, like a parcel of land, a mine, or a
work of art.

Normal probability distribution

A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.

Notes to the financial statements

A detailed set of notes immediately following the financial statements in
an annual report that explain and expand on the information in the financial statements.

NPV profile

A graph of NPV as a function of the discount rate.

Official statement

A statement published by an issuer of a new municipal security describing itself and the issue

Operating profit margin

The ratio of operating margin to net sales.

Optimal redemption provision

provision of a bond indenture that governs the issuer's ability to call the
bonds for redemption prior to their scheduled maturity date.

Optimization approach to indexing

An approach to indexing which seeks to Optimize some objective, such
as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.

Performance attribution analysis

The decomposition of a money manager's performance results to explain
the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What
were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was
market timing statistically significant? And (4), Was security selection statistically significant?

Performance evaluation

The evaluation of a manager's performance which involves, first, determining
whether the money manager added value by outperforming the established benchmark (performance
measurement) and, second, determining how the money manager achieved the calculated return (performance
attribution analysis).

Performance measurement

The calculation of the return realized by a money manager over some time interval.

Performance shares

Shares of stock given to managers on the basis of performance as measured by earnings
per share and similar criteria. A control device used by shareholders to tie management to the self-interest of
shareholders.

Planned capital expenditure program

Capital expenditure program as outlined in the corporate financial plan.

Planned financing program

program of short-term and long-term financing as outlined in the corporate
financial plan.

Preliminary prospectus

A preliminary version of a prospectus.

Price discovery process

The process of determining the prices of the assets in the marketplace through the
interactions of buyers and sellers.

Pro forma capital structure analysis

A method of analyzing the impact of alternative capital structure
choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will
be able to use projected tax shield benefits fully.

Probability

The relative likelihood of a particular outcome among all possible outcomes.

Probability density function

The probability function for a continuous random variable.

Probability distribution

Also called a probability function, a function that describes all the values that the random variable can
take and the probability associated with each.

Probability function

A function that assigns a probability to each and every possible outcome.

Product cycle

The time it takes to bring new and/or improved products to market.

Product risk

A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or
inventory but does not have a sale commitment at a prearranged price.

Production payment financing

A method of nonrecourse asset-based financing in which a specified
percentage of revenue realized from the sale of the project's output is used to pay debt service.

Production-flow commitment

An agreement by the loan purchaser to allow the monthly loan quota to be
delivered in batches.

Profit margin

Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
percentage.

Profitability index

The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.

Profitability ratios

Ratios that focus on the profitability of the firm. profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
investment.

Program trades

Also called basket trades, orders requiring the execution of trades in a large number of
different stocks at as near the same time as possible. Related: block trade

Program trading

Trades based on signals from computer programs, usually entered directly from the trader's
computer to the market's computer system and executed automatically.

Progress review

A periodic review of a capital investment project to evaluate its continued economic viability.

Progressive tax system

A tax system wherein the average tax rate increases for some increases in income but
never decreases with an increase in income.

Project loan certificate (PLC)

A primary program of Ginnie Mae for securitizing FHA-insured and coinsured
multifamily, hospital, and nursing home loans.

Project loan securities

Securities backed by a variety of FHA-insured loan types - primarily multi-family
apartment buildings, hospitals, and nursing homes.

Project loans

Usually FHA-insured and HUD-guaranteed mortgages on multiple-family housing complexes,
nursing homes, hospitals, and other development types.

Project notes (PNs)

project notes are issued by municipalities to finance federally sponsored programs in
urban renewal and housing and are guaranteed by the U.S. Department of Housing and Urban Development.
project financing A form of asset-based financing in which a firm finances a discrete set of assets on a standalone
basis.
projected benefit obligation (PBO) A measure of a pension plan's liability at the calculation date assuming
that the plan is ongoing and will not terminate in the foreseeable future. Related:accumulated benefit obligation.

Projected maturity date

With CMOs, final payment at the end of the estimated cash flow window.

Promissory note

Written promise to pay.

Property rights

Rights of individuals and companies to own and utilize property as they see fit and to receive
the stream of income that their property generates.

Prospectus

formal written document to sell securities that describes the plan for a proposed business
enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision.
prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information.

Protectionism

protecting domestic industry from import competition by means of tariffs, quotas, and other
trade barriers.

Protective covenant

A part of the indenture or loan agreement that limits certain actions a company takes
during the term of the loan to protect the lender's interests.

Protective put buying strategy

A strategy that involves buying a put option on the underlying security that is
held in a portfolio. Related: Hedge option strategies

Provisional call feature

A feature in a convertible issue that allows the issuer to call the issue during the noncall
period if the price of the stock reaches a certain level.

Proxy

Document intended to provide shareholders with information necessary to vote in an informed manner
on matters to be brought up at a stockholders' meeting. Includes information on closely held shares.
Shareholders can and often do give management their proxy, representing the right and responsibility to vote
their shares as specified in the proxy statement.

Proxy contest

A battle for the control of a firm in which the dissident group seeks, from the firm's other
shareholders, the right to vote those shareholder's shares in favor of the dissident group's slate of directors.
Also called proxy fight.

Proxy vote

Vote cast by one person on behalf of another.

Put provision

Gives the holder of a floating-rate bond the right to redeem his note at par on the coupon
payment date.

Registration statement

A legal document that is filed with the SEC to register securities for public offering.

Regulatory accounting procedures

Accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
asset sold.

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