QUIZLET STUDY SET

Accounting

the system of recording, reporting, and summarizing past financial information and transactions

Accounts Receivable Turnover (AR turnover)

an activity ratio found by credit sales divided by accounts receivable. credit sales/accounts receivable

credit sales/accounts receivable

Activity Ratios

a category of ratio that measures how well a company uses its assets to generate sales or cash, showing the firm’s operational efficiency and profitability

Additional Funds Needed (AFN)

another name for the discretionary financing needed or external financing needed. It represents the additional financing needed given a firm’s expectations for future growth

Affirmative Convenants

a bond covenant that describes things the company pledges itself to do in order to protect bondholders

Agency Costs

costs that are incurred when management does not act in the best interest of shareholders

Agency Problem

when the agent (the management) does not act in the best interest of the principal (the owner)

Aggressive Assets

companies or securities with beta greater than 1

Annual Percentage Rate (APR)

the annual interest rate that is charged for borrowing money or that is earning through investment

Annuity

a stream of cash flows of an equal amount paid every consecutive period

Annuity Due

a series of equal payments made at the beginning of consecutive periods

Asset pricing

the process of valuing assets

Auction market

a secondary market with a physical location and where prices are determined by investors’ willingness to pay

Average collection period (ACP)

an activity ratio found by the number of days in a year (365) divided by AR turnover

365/AR turnover

Balance Sheet Forecasting

using sales growth and the profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances

Banks and Credit Unions

receive deposits and extend loans to individuals and businesses

Benchmarking

the process of completing a financial analysis to compare a firm’s financial performance to that of other similar firms

Beta

a variable that describes how the price of a security varies with the market

bid-ask spread

the difference between the bid and ask prices that compensate the specialist for the risk that he or she bears for willingness to provide liquidity

Board of Directors

a group of people who jointly supervise the activities of organizations

bond indenture

a legal contract that governs the relationship between a firm and its bondholders

Bondholders

a person who loans a corporation money by buying debt securities

Business Finance

an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources

Cannibalization

the reduction in sales of a company’s own products due to introduction of another similar

Capital

a financial asset that can be used by a firm or individual. ex. may be machinery or cash held by a firm

Capital Asset Pricing Model (CAPM)

a model used to determine the required return on an asset

Capital Budgeting

the process of evaluation and planning for purchases of long-term assets

Capital Budgeting Criteria

metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment

Capital markets

a type of financial market used for long-term assets that are held for greater than one year

Capital Structure

the mixture of debt and equity used to finance a firm

Capital-Constrained Environment

when a limited amount of funds are available

Cash Budgets

a plan for controlling cash inflows business to balance income with expenditures

Cash Management

managing the day-to-day finance operations of a firm

Central Banks

ensure that a nation’s economy remains healthy by controlling the amount of money circulating in the economy

common stock

a type of stock that represents equity in a firm and confers the right to vote at shareholder meetings

Compounding

finding a future value given a present value

Compounding interest

the interest on the principle plus the interest on earned interest

Corporate Bonds

a debt instrument that is issued by a corporation in order to raise capital

Corporate Governance

the system of rules, practices, and processes by which a firm is directed and controlled

Correlation

the measure of the relationship between 2 variables that move in relation to each other

Cost of Capital

the cost to a firm to use an investor’s capital'; see interest rate

Coupon Rate

the stated interest rate of a bond; also known as coupon yield

Covenants

statements in a bond indenture that outline things the company will obligate itself to do or not do in order to protect bondholders

Credit Analysts

a commercial bank position with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients

Cross-sectional Analysis

comparing a firm’s financial ratios to other firms’ ratios or industry averages

Cumulative

a feature of preferred stock specifying that if a company skips payment of a preferred stock dividend one year, it is still required to pay dividend sometime in the future before paying common dividends

Current Market Value

what someone would pay right now for an asset

Current Ratio

a liquid ratio found by current assets divided by current liabilities,

current assets/current liabilities

Dealer Market

a secondary market made up of a multiple dealers that hold an inventory of securities and quote prices

Debt Ratio

a financing ratio found by total liabilities divided by total equity

liabilities/total equity

Default

failure to meet a debt obligation

Defensive assets

companies or securities with betas less than 1

discount bonds

a bond whose price is below its par value

Discount Rate

the name for interest rate when used in time value of money calculations

Discounting

finding a present value given a future value

Discretionary accounts

accounts that do not vary automatically with sales but are left to the discretion of management

Discretionary Financing Needed (DFN)

the additional financing needed given a firm’s expectations for future growth

Diversification

the process of “spreading” your money over many different assets

Dividend Discount Model

a model used to evaluate common stock that calculates the value of a share of common stock today by taking the present value of future dividend cash flows

Dividends in Arrears

a feature of preferred stock specifying that if a company ignores preferred stock dividends; it cannot pay anything to its common stockholders

DuPont Framework

an expanded formula of the return of equity, net margin times total asset turnover times leverage multiplier, which represent the components of profitability, activity (efficiency) and financing

Efficient Market

a market in which prices fully reflect all the available information about a specific security

Estates

everything that a person owns or controls, especially at death

Ethical Dilemma

an issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint

Ethics

Following accepted standards of moral conduct

Expected Return

a hypothesised estimate of future prices or returns under different scenarios based on expectational data

External Financing Needed (EFN)

another name for the discretionary financing needed or additional funds needed. it represents the additional financing needed given a firm’s expectations for future growth

Face Value

the sum of money that a corporation promises to pay at the expiration of a bond; also called par value

Finance

the study of managing and allocating funds at the personal or business level

Financial Institution

an area of finance that includes firms or organizations that exist to accept a wide variety of deposits, to offer investment products to individuals and products to individuals and businesses, to provide loans, or to broker financial transactions

Financial Managers

a person who makes strategic financial decisions in a corporation

Financial Policy Implementation

incorporating new finance ideas within a firm

Financial Risk

increased volatility in earnings as a result of using debt

Firm-specific Risk

risk that results from factors at a particular firm and can be reduced through diversification; also called nonsystematic risk or idiosyncratic risk

Fisher Effect

an economic theory developed by Irving Fisher holding that the real interest rate is equivalent to the nominal interest rate minus the expected inflation rate

Fixed Expenditures

an expense that you do not have direct control over and that remains constant from period to period

Fixed-income Securities

another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year

Future Value

the worth of cash flows in terms of the dollar amount in the relative future

Gordon Growth Model

a formula used to value common stock based on the assumptions that dividends are paid every year and grow at constant rate forever

Gross margin

a profitability ratio found by gross profit divided by sales

Harvest

the return over the entire period that an investor owns a financial security

Holding Period Return

the return over the entire period that an investor owns a financial security

Hurdle Rate

the required rate of return that a company expects to earn in order to consider a project

Hybrid Security

a security that has some elements that resemble equity and others that resemble debt

Idiosyncratic Risk

risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or nonsystematic risk

Incremental Cash Flows

cash flows that result from accepting a project

Inflation

the rate at which the average price level of a basket of goods and services in an economy increase over a period of time

Initial Public Offering (IPO)

when a privately held company first offers shares of stock to outside investors to raise capital; therefore becoming a publicly owned company

Insurance Companies

Charge premiums to invest in bonds and stocks to pay claims

Interest Rate

the percentage of the principal that a lender charges a borrower for the use of assets

Interest rate Risk

the probability that changes in interest rates will impact the value of a bond

internal rate of return (IRR)

the rate of return that a firm earns on its capital projects

Intrinsic Value

the value of an asset as determined through fundamental analysis without referring to the asset’s market value

Inventory Turnover

An activity ratio found by COGS divided by inventory

Investment Bank

a financial intermediary that offers complex financial transactions such as underwriting, facilitating mergers, and buying and selling financial securities on behalf of large institutions

investments

an area of finance that involves deciding which assets to invest in to create wealth in the future

legal

following the laws and rules set by authority

leverage

another name for debt or liability

leverage ratios

a category of ratios that consider how a firm is financed

liquid asset

an asset that can be converted into cash quickly without the loss of significant value