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“The lot of a holder of junior preferred stock is not always a happy one,” observed the Delaware Chancery Court in Benchmark Capital Partners IV, L.P. v. Vague. It certainly wasn’t for Benchmark Capital Partners. Benchmark’s fate holds important lessons for institutions and funds that invest in preferred stock. Preferred stock investors typically seek voting rights or veto rights over certain significant corporate actions and against direct economic impairment of the preferred stock investment. The Benchmark case illustrates some limitations of such traditional preferred stock protective provisions. Examining these limitations illustrates several ways that investors may help limit impairment of their preferred stock investments.

The purpose of this chapter is to outline the steps involved in obtaining venture capital funding for a start-up business. The chapter first discusses access to Venture Capitalists (VCs) and provides the reasons behind VCs’ preference for investing in a traditional C corporation rather than a limited liability company or other pass-through entity. The chapter then describes both the due diligence performed by VC's counsel and the documentation a start-up must provide to satisfy that diligence need. Next, the chapter addresses typical terms of financing deals with VCs, including the types of securities issued and the rights, preferences, and pricing of those securities. Finally, the chapter concludes with a chart identifying the VC financing terms available before and after a significant market downturn and a sample term sheet summarizing the terms of preferred stock to be issued to a hypothetical VC or VC group investing in a start-up business.

The price of a company's stock affects many aspects of its operations, ranging from access to capital to executive compensation to acquisition strategy. Unfortunately, too few managers understand why stock prices are important and what is a high or low price. The authors provide a model of stock price performance, examine the link to business unit profitability, and suggest some steps to improve your company's market valuation.

The purpose of this paper is to study the dynamic relationship between foreign exchange and stock returns. Specifically, the authors examine the impact of the 2008 financial crises on the relation between foreign exchange and stock returns in the MENA region.

The authors examine the long-run relation between these two variables using VECM and the authors study the volatility behavior of these two variables using the Dynamic VECH–generalized autoregressive conditional heteroskedasticity (GARCH) model. The sample covers the MENA region over the period 2004–2015.

The results indicate a regime shift in three countries: Egypt, Tunisia and Morocco. In addition, the results assert asymmetric relation between stock returns and changes in exchange rates during pre-crisis and post-crisis periods. Modeling the volatility of the foreign exchange and stock return and their covariance using VECH–GARCH suggests that the persistence in volatility is more prominent in the crisis/post-crisis period as compared with the pre-crisis period. Finally, the authors also find more significant results for the persistence parameter in the covariance between stock return and foreign exchange in the crisis/post-crisis period as compared with the pre-crisis period.

To the best of the authors’ knowledge, the studies by Wong and Li (2010) and Caporale et al. (2014) are the only two that have examined the interaction between stock prices and foreign exchange during the recent financial crisis of 2008. To the authors’ knowledge, none of the previous literature examined the impact of financial 2008 crisis on the relation between foreign exchange and stock prices in the MENA.

The case can be taught in an introductory corporate finance course or to more experienced students or executives to spur a discussion about share repurchases and corporate financial strategies in general. If used in an introductory course, the case is most effective if preceded by a traditional dividend class. It follows a portfolio manager of Johnson & Associates, Mark Johnson, who is reviewing his holdings, including his position in AutoZone in early 2012. A prominent shareholder, Edward Lampert, had begun liquidating his position in AutoZone, and Johnson is concerned that Lampert's reduced position could lead the company to stop using share repurchases as a method of distributing cash flows to shareholders. The case lists a number of alternative uses for the cash flows and asks students to assume Johnson's role as an analyst and assess the likely impact of those alternatives on AutoZone's stock price.

Variations in price/earnings (P/E) ratios are explained in a rational expectations framework by a number of fundamental factors, such as differences in growth expectations and risk. The purpose of this paper is to use a regression model and data from four sample periods (1996, 2000, 2001, and 2008) to separate the earnings/price (E/P) ratio into two parts – the portion of E/P that is related to fundamental determinants and a residual portion that cannot be explained by fundamentals. The authors use the residual portion as an indicator of over or undervaluation; a large negative residual is consistent with overvaluation while a large positive residual implies undervaluation. The authors find that stocks with larger negative residuals are associated with lower subsequent returns and reward-to-risk ratio, while stocks with larger positive residuals are associated with higher subsequent returns and reward-to-risk ratio. This pattern persists for both one and two-year holding periods.

This study uses a regression methodology to decompose E/P into two parts – the portion of E/P than is related to fundamental determinants and a residual portion that cannot be explained by fundamentals. Focussing on the second portion allows us to isolate a potential indicator of stock over or undervaluation. Using a sample of stocks from four time periods (1996, 2000, 2001, and 2008, the authors calculate the residuals from a regression model of the fundamental determinants of cross-sectional variation in E/P. These residuals are then ranked and used to divide the stock sample into deciles, with the first decile containing the stocks with the highest negative residuals (indicating overvaluation) and the tenth decile containing stocks with the highest positive residuals (indicating undervaluation). Total returns for subsequent one and two-year holding periods are then calculated for each decile portfolio.

The authors find that high positive residual stocks substantially outperform high negative residual stocks. This is true even after risk adjustments to the portfolio returns. The residual E/P appears to accurately predict relative stock performance with a relatively high degree of accuracy.

The findings of this paper provide some important implications for practitioners and investors, particularly for the stock selection, fund allocations, and portfolio strategies. Practitioners can still rely on a valuation measure such as E/P as a useful tool for making successful investment decisions and enhance portfolio performance. Investors can earn abnormal returns by allocating more weights on stocks with high E/P multiples. Portfolios of high E/P multiples or undervalued stocks are found to enjoy higher risk-adjusted returns after controlling for the fundamental factors. The most beneficial performance holding period return will be for a relatively short period of time ranging from one to two years. Relying on the E/P valuation ratios for a long-term investment may add little value.

Practitioners and academics have long relied on the P/E ratio as an indicator of relative overvaluation. An increase in the absolute value of P/E, however, does not always indicate overvaluation. Instead, a high P/E ratio can simply reflect changes in the fundamental factors that affect P/E. The authors find that stocks with larger negative residuals are associated with lower subsequent returns and coefficients of variation, while stocks with larger positive residuals are associated with higher subsequent returns and coefficients of variation. This pattern persists for both one and two-year holding periods.

The P/E ratio is widely used, particularly by practitioners, as a measure of relative stock valuation. The ratio has been used in both cross-sectional and time series comparisons as a metric for determining whether stocks are under or overvalued. An increase in the absolute value of P/E, however, does not always indicate overvaluation. Instead, a high P/E ratio can simply reflect changes in the fundamental factors that affect P/E. If interest rates are relatively low, for example, the time series P/E should be correspondingly higher. Similarly, if the risk of a stock is low, that stock’s P/E ratio should be higher than the P/E ratios of less risky stocks. The authors examine the cross-sectional behavior of the P/E (the authors actually use the E/P ratio for reasons explained below) after controlling for factors that are likely to fundamentally affect this ratio. These factors include the dividend payout ratio, risk measures, growth measures, and factors such as size and book to market that have been identified by Fama and French (1993) and others as important in explaining the cross-sectional variation in common stock returns. To control for changes in these primary determinants of E/P, the authors use a simple regression model. The residuals from this model represent the unexplained cross-sectional variation in E/P. The authors argue that this unexplained variation is a more reliable indicator than the raw E/P ratio of the relative under or overvaluation of stocks.

Acting as chief financial officer (CFO), students try to determine how Coleco can fend off creditors. Coleco is in default on its loans and is in a negative equity position.

This chapter explores correspondences between the costs and benefits of financial and circus safety nets. The author stresses the idea that the character of a country's net cannot be static. It must adapt promptly to changes in the market, legal, bureaucratic, and ethical problems it is intended to alleviate.

Safety nets expand over time for two reasons. First, large firms whose operations lie formally outside the net have strong incentives to make themselves too difficult for authorities to fail and unwind in crisis circumstances. Second, in good times, safety-net managers underinvest in crisis planning. As a result, crisis-generated changes in the ordering of regulatory norms dispose them to rescue firms that are difficult to fail and unwind without holding themselves closely accountable for either the costs or the distributional effects of the subsidies the rescue engenders.

This paper aims to investigate the empirical effects of an inconsistency in the calculation of the diluted earnings per share (EPS) number which originated in Accounting Principles Board Opinion No. 15 (APB 15) and continues in Statement of Financial Accounting Standard No. 128 (SFAS 128), EPS. The discrepancy involves the treatment of dilutive warrants and options versus other dilutive convertible securities and is explained in the section of this paper where the authors describe the proposed alternative EPS model. In a sample of 55 publicly traded companies in which they applied their model, it was found that the average increase in diluted EPS to be 5.7 per cent and the median increase to be 3.8 per cent. The authors believe that SFAS 128 should be considered, along with other factors, to be revised to direct that diluted EPS be computed in accordance with their model.

The authors selected a sample of companies from the Compustat Annual Database that had either Convertible Debt or Convertible Stock or both with a year-end between July 1, 2011 and July 1, 2012 which was the most recent data available at the time of the initial study. They then used the model assuming a “repurchase” of common shares as if the “treasury stock method” which applies to options and warrants also applied to these conversions. They then reduced the number of shares initially used to compute diluted EPS by the number of assumed repurchased shares. Using the revised number of shares, the authors recomputed diluted EPS as a percentage of the originally reported diluted EPS.

For the 55 companies in the sample, the average increase in diluted EPS using the “treasury stock method” was 5.7 per cent. The median increase was 3.8 per cent. The largest increase was 26.6 per cent and the smallest was 0 per cent.

This is a one-year study of the sampled firms. A multi-year sample is recommended for further research. Also, the sample might be applied to foreign entities under the jurisdiction of IAS 33.

According to the Financial Accounting Standards Board (FASB) the price-earnings ratio of an equity is perhaps the most frequently cited statistic in the business of equity investments. As the denominator in the price-earnings ration is the “diluted” EPS figure calculated under generally accepted accounting principles (GAAP) under Statement of Financial Accounting No. 128 (SFAS 128), the results have very significant implications for the recommended study and revision of the diluted EPS statistic.

If the current diluted EPS reported numbers result in lower stock prices than would otherwise be the case under the authors’ model, then it seems likely that these companies with large amounts of debt would have a higher cost of equity capital than would otherwise be the case. The overall result would be a different allocation of equity capital than would be the case if convertible debt and convertible equity were treated the same way as options and warrants. As we are unaware of a rationale for the disparate treatment, it is believed that this a is a misallocation caused by a statement of the Financial Accounting Standards Board (FASB) that seems flawed and recommend that it be considered to be revised.

A review of the literature found no other study addressing this issue.

To analyze the cases and sanctions FINRA reported in 2014 and prior years to evaluate what issues may be important for broker-dealers and their representatives in the future.

This article discusses the overall statistics for cases reported by FINRA in 2014 and then focuses on the top enforcement issues for FINRA and some of the key cases. All of this analysis includes a comparison to enforcement statistics from prior years to help identify potential trends.

This article concludes that 2014 was a blockbuster year for FINRA as the fines imposed by the regulator increased by 125 per cent. This article also finds that while FINRA is still focusing on many of the same issues as before, including advertising and trade reporting, other issues, such as anti-money laundering, received a significant spike in attention in 2014.

This article contains valuable information about recent FINRA enforcement activity and practical guidance from experienced securities lawyers.