Question

Define: a. investment bank b. dividend

Short answer

a. An Investment bank is an intermediary institution that facilitates the issuance and distribution of securities. It also provides consultation services in the event of mergers and acquisitions. \n b. A Dividend is a portion of a company's earnings that is distributed to its shareholders in cash or additional shares.

Step-by-step solution

Definition of an Investment Bank

An investment bank is a financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities. Additionally, an investment bank may also assist companies involved in mergers and acquisitions (M&A), and provide ancillary services such as market making, trading of derivatives, and equity securities.

Definition of a Dividend

A dividend is a payment made by a corporation to its shareholders, usually in the form of cash dividends, or additional shares known as share dividends. It's essentially a portion of the company's earnings that is distributed to the shareholders. The amount of dividend is decided by the board of directors and it depends on various factors such as the company's profit, reserve capital, and dividend payout policy.

Key concepts

Financial Capital

Financial capital refers to the resources used by businesses to fund their operations and growth. It can come from a variety of sources and is crucial for businesses to thrive. Companies raise financial capital to invest in projects, expand operations, or even keep daily activities running smoothly.
There are several types of financial capital, including equity and debt.

• Equity capital involves issuing shares to investors, giving them partial ownership of the company.
• Debt capital involves borrowing funds that need to be repaid over time, usually with interest.

Understanding financial capital is essential for assessing a company's financial health and its ability to undertake new ventures.

Securities Underwriting

Securities underwriting is a key service provided by investment banks. It involves assessing, pricing, and facilitating the sale of stocks or bonds to help companies raise capital. This process is crucial when companies decide to go public by launching an Initial Public Offering (IPO).
The underwriters work closely with the issuing company to set the right price for the new shares, balancing the demand from potential investors with the company's capital needs. They also take on the risk by purchasing the securities from the company and selling them to the public. By doing this, underwriters provide a guarantee that the company will receive the needed funds. This also helps ensure market stability during the offering.

Dividends

Dividends are payments made by a corporation to its shareholders from the company's earnings. They serve as a reward for investors, allowing them to share in the profitability of a company. Dividends can be distributed in several forms, with the most common being cash dividends and share dividends.
Cash dividends are a direct payment of cash to shareholders, while share dividends grant additional shares. The board of directors plays a vital role in deciding if and how much dividend is to be distributed, taking into account factors like profit levels and future investment plans. While not all companies pay dividends, they are often seen as a sign of financial health and stability.

Mergers and Acquisitions

Mergers and Acquisitions (M&A) refer to the process where companies consolidate through various forms of financial transactions. Investment banks play a significant role in M&A by providing advisory services, helping companies navigate the complex process of combining businesses or acquiring another company.
Mergers involve the conscious blending of two companies into one new entity, generally to enhance competitive strength or expand product offerings. Acquisitions occur when one company takes over another, either through purchasing the majority of its shares or by buying its assets outright. The goal is generally to grow size, improve efficiency, or gain market share.

• Mergers are usually between two companies of similar size.
• Acquisitions often see a larger company buying a smaller one.

Through these processes, businesses aim to create shareholder value and drive growth.