Definition of reinvestment assumption

reinvestment assumption

an assumption made about the rates of return that will be earned by intermediate cash flows from a capital project; NPV and PI assume reinvestment at the discount rate; IRR assumes reinvestment at the IRR

Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.

Economic assumptions

Economic environment in which the firm expects to reside over the life of the
financial plan.

Homogenous expectations assumption

An assumption of Markowitz portfolio construction that investors
have the same expectations with respect to the inputs that are used to derive efficient portfolios: asset returns,
variances, and covariances.

Reinvestment rate

The rate at which an investor assumes interest payments made on a debt security can be
reinvested over the life of that security.

Reinvestment risk

The risk that proceeds received in the future will have to be reinvested at a lower potential
interest rate.

economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

Baker Plan

A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor
countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased
financing from the World Bank and continued lending from commercial banks.

Cash dividend

A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and return of capital in
addition to the dividend.

Corporate financial planning

Financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.

Cum dividend

With dividend.

Cumulative dividend feature

A requirement that any missed preferred or preference stock dividends be paid
in full before any common dividend payment is made.

Defined benefit plan

A pension plan in which the sponsor agrees to make specified dollar payments to
qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor.
Related: defined contribution plan

Defined contribution plan

A pension plan in which the sponsor is responsible only for making specified
contributions into the plan on behalf of qualifying participants. Related: defined benefit plan
Delayed issuance pool Refers to MBSs that at the time of issuance were collateralized by seasoned loans
originated prior to the MBS pool issue date.

Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

Dividend

A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock
selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.

Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.

Dividend clientele

A group of shareholders who prefer that the firm follow a particular dividend policy. For
example, such a preference is often based on comparable tax situations.

Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.

Dividend payout ratio

Percentage of earnings paid out as dividends.

Dividends per share

Amount of cash paid to shareholders expressed as dollars per share.

Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.

Dividend rate

The fixed or floating rate paid on preferred stock based on par value.

Dividend rights

A shareholders' rights to receive per-share dividends identical to those other shareholders receive.

Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

Dividends per share

dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a weighted average of
shares outstanding over the reporting term.

Economic defeasance

See: in-substance defeasance.

Economic dependence

Exists when the costs and/or revenues of one project depend on those of another.

Economic earnings

The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

Economic exposure

The extent to which the value of the firm will change because of an exchange rate change.

Economic income

Cash flow plus change in present value.

Economic order quantity (EOQ)

The order quantity that minimizes total inventory costs.

Economic rents

Profits in excess of the competitive level.

Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.

Economic surplus

For any entity, the difference between the market value of all its assets and the market
value of its liabilities.

Economic union

An agreement between two or more countries that allows the free movement of capital,
labor, all goods and services, and involves the harmonization and unification of social, fiscal, and monetary
policies.

Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of
employees.

Extra or special dividends

A dividend that is paid in addition to a firm's "regular" quarterly dividend.

Ex-dividend

This literally means "without dividend." The buyer of shares when they are quoted ex-dividend
is not entitled to receive a declared dividend.

Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to
the most recently announced dividend payment. This date set by the NYSE (and generally followed on other
US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is
marked with an x in newspaper listings on that date.

Financial plan

A financial blueprint for the financial future of a firm.

Financial planning

The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.

Floor planning

Arrangement used to finance inventory. A finance company buys the inventory, which is then
held in trust by the user.

Homemade dividend

Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.

Indicated dividend

Total amount of dividends that would be paid on a share of stock over the next 12 months
if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in
stock tables.

Insured plans

Defined benefit pension plans that are guaranteed by life insurance products. Related: noninsured plans

Leading economic indicators

economic series that tend to rise or fall in advance of the rest of the economy.

Long-term financial plan

Financial plan covering two or more years of future operations.

Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.

Materials requirement planning

Computer-based systems that plan backward from the production schedule
to make purchases in order to manage inventory levels.

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.

Non-insured plans

Defined benefit pension plans that are not guaranteed by life insurance products. Related:
insured plans

Overfunded pension plan

A pension plan that has a positive surplus (i.e., assets exceed liabilities).

Pension plan

A fund that is established for the payment of retirement benefits.

Perfect market view (of dividend policy)

Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.

Plan for reorganization

A plan for reorganizing a firm during the Chapter 11 bankruptcy process.

Plan sponsors

The entities that establish pension plans, including private business entities acting for their
employees; state and local entities operating on behalf of their employees; unions acting on behalf of their
members; and individuals representing themselves.

Planned amortization class CMO

1) One class of CMO that carries the most stable cash flows and the
lowest prepayement risk of any class of CMO. Because of that stable cash flow, it is considered the least risky CMO.
2) A CMO bond class that stipulates cash-flow contributions to a sinking fund. With the PAC,
principal payments are directed to the sinking fund on a priority basis in accordance with a predetermined
payment schedule, with prior claim to the cash flows before other CMO classes. Similarly, cash flows
received by the trust in excess of the sinking fund requirement are also allocated to other bond classes. The
prepayment experience of the PAC is therefore very stable over a wide range of prepayment experience.

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.

Planning horizon

The length of time a model projects into the future.

Residual dividend approach

An approach that suggests that a firm pay dividends if and only if acceptable
investment opportunities for those funds are currently unavailable.

Short-term financial plan

A financial plan that covers the coming fiscal year.

Signaling view (on dividend policy)

The argument that dividend changes are important signals to investors
about changes in management's expectation about future earnings.

Special dividend

Also referred to as an extra dividend. dividend that is unlikely to be repeated.

Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.

Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.

Tax-deferred retirement plans

Employer-sponsored and other plans that allow contributions and earnings to
be made and accumulate tax-free until they are paid out as benefits.

Traditional view (of dividend policy)

An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.

Underfunded pension plan

A pension plan that has a negative surplus (i.e., liabilities exceed assets).

With dividend

Purchase of shares in which the buyer is entitled to the forthcoming dividend. Related: exdividend.

Withdrawal plan

The ability to establish automatic periodic mutual fund redemptions and have proceeds
mailed directly to the investor.

Dividend

A payment a company makes to stockholders. Earnings before income tax. The profit a company made
before income taxes.

Dividend

The payment of after-tax profits to shareholders as their share of the profits of the business for an accounting period.

Economic Value Added (EVA)

Operating profit, adjusted to remove distortions caused by certain accounting rules, less a charge
to cover the cost of capital invested in the business.

Planning, programming and budgeting system (PPBS)

A method of budgeting in which budgets are allocated to projects or programmes rather than to responsibility centres.

Dividend income

Income that a company receives in the form of dividends on stock in other companies that it holds.

Dividends

Amounts paid to the owners of a company that represent a share of the income of the company.

dividend payout ratio

Computed by dividing cash dividends for the year
by the net income for the year. It’s simply the percent of net income distributed
as cash dividends for the year.

dividend yield ratio

Cash dividends paid by a business over the most
recent 12 months (called the trailing 12 months) divided by the current
market price per share of the stock. This ratio is reported in the daily
stock trading tables in the Wall Street Journal and other major newspapers.

property, plant, and equipment

This label is generally used in financial
reports to describe the long-term assets of a business, which include
land, buildings, machinery, equipment, tools, vehicles, computers, furniture
and fixtures, and other tangible long-lived resources that are not
held for sale but are used in the operations of a business. The less formal
name for these assets is fixed assets, which see.

cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits

dividend growth method

a method of computing the cost
of common stock equity that indicates the rate of return
that common shareholders expect to earn in the form of
dividends on a company’s common stock

economic integration

the creation of multi-country markets
by developing transnational rules that reduce the fiscal and
physical barriers to trade as well as encourage greater economic
cooperation among countries

economic order quantity (EOQ)

an estimate of the number
of units per order that will be the least costly and provide
the optimal balance between the costs of ordering
and the costs of carrying inventory

economic production run (EPR)

an estimate of the number
of units to produce at one time that minimizes the total
costs of setting up production runs and carrying inventory

economically reworked

when the incremental revenue from the sale of reworked defective units is greater than
the incremental cost of the rework

economic value added (EVA)

a measure of the extent to which income exceeds the dollar cost of capital; calculated
as income minus (invested capital times the cost of capital percentage)

Employee Stock Ownership Plan (ESOP)

a profit-sharing compensation program in which investments are made in
the securities of the employer

enterprise resource planning (ERP) system

a packaged software program that allows a company to
(1) automate and integrate the majority of its business processes,
(2) share common data and practices across the entire enterprise, and
(3) produce and access information in a realtime environment

manufacturing resource planning (MRP II)

a fully integrated materials requirement planning system that involves
top management and provides a basis for both strategic
and tactical planning

materials requirements planning (MRP)

a computerbased information system that simulates the ordering and
scheduling of demand-dependent inventories; a simulation
of the parts fabrication and subassembly activities that are
required, in an appropriate time sequence, to meet a production
master schedule

operational plan

a formulation of the details of implementing
and maintaining an organization’s strategic plan;
it is typically formalized in the master budget

planning

the process of creating the goals and objectives for
an organization and developing a strategy for achieving
them in a systematic manner

strategic planning

the process of developing a statement of
long-range (5–10 years) goals for the organization and
defining the strategies and policies that will help the organization
achieve those goals

tactical planning

the process of determining the specific
means or objectives by which the strategic plans of the
organization will be achieved; it is short-range in nature
(usually 1–18 months)

Dividend

A payment made to shareholders that is proportional to the number of shares
owned. It is authorized by the Board of Directors.

Economic life

The period over which a company expects to be able to use an asset.

Manufacturing resource planning (MRP II)

An expansion of the material requirements planning concept, with additional computer-based capabilities in the areas of
direct labor and machine capacity planning.

Material requirements planning (MRP)

A computer-driven production methodology
that manufactures products based on an initial demand forecast. It tends to result in
more inventory of all types than a just-in-time (JIT) production system.

Pension plan

A formal agreement between an entity and its employees, whereby the
entity agrees to provide some benefits to the employees upon their retirement.

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