Finance exam 3 terms

capital budgeting

the decision-making process with respect to investment in fixed assets

capital rationing

a process that companies use to decide which investment opportunities make the most sense for them to pursue

mutually exclusive projects

projects that, if undertaken, would serve the same purpose. Thus, accepting one will necessarily mean rejecting the others

size disparity

mutually exclusive projects of unequal size are examined

time disparity

conflict in ranking proposals by the NPV and IRR which have different patterns of cash inflows

profit retention rate

companies percentage of profits retained

dividend payout ratio

percentage of profits paid out in dividends

cumulative feature

a requirement that all past, unpaid preferred stock dividends be paid before any common stock dividends are declared

protective provisions

terms that allow preferred shareholders to veto or block specific corporate actions

convertible preferred stock

preferred shares that can be converted into a predetermined number of shares of common stock, if investors so choose

call provision

a provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods

sinking-fund provisions

– a protective provision often contained in bond or preferred stock contracts that requires the firm periodically to set aside an amount of money for the retirement of the stock or bond issue

limited liability

a protective provision whereby the investor is not liable for more than the amount he or she has invested in the firm

proxy

a means of voting in which a designated party is provided with the temporary power to vote for the signee at the corporation’s annual meeting

majority voting

each share of stock allows the shareholder one vote and each position on the board of directors is voted on separately

cumulative voting

each share of stock slows the stockholder a number of votes equal to the number of directors being elected

working capital

the diference between the firm's current assets and its current liabilities

project standing alone risk

which is a project’s risk ignoring the fact that much of this risk will be diversified away—this is the project’s standard deviation

contribution to firm risk

which is the amount of risk that the project contributes to the firm as a whole; this measure considers the fact that some of the project’s risk will be diversified away as the project is combined with the firm’s other projects and assets, but it ignores the effects of the diversification of the firm’s shareholders

systematic risk

which is the risk of the project from the viewpoint of a well-diversified shareholder; this measure takes into account that some of a project’s risk will be diversified away as the project is combined with the firm’s other projects, and, in addition, some of the remaining risk will be diversified away by shareholders as they combine this stock with other stocks in their portfolios.

risk adjusted discount rate

based on the notion that investors require higher rates of return on more risky projects

pure play method

a method for estimating a project’s or division’s beta that attempts to identify publicly traded firms engaged solely in the same business as the project or division

simulation

a method for dealing with risk whereby the performance of the project under evaluation is estimated by randomly selecting observations from each of the distributions that affect the outcome of the project and continuing with this process until a representative record of the project’s probable outcome is assembled.

scenario analysis

a simulation approach for gauging a project’s risk under the worst, best, and most likely outcomes

sensitivity analysis

a method for dealing with risk whereby the change in the distribution of possible net present values or internal rates of return for a particular project resulting from a change in one particular input variable is calculated

preemptive right

the right entitling the common shareholder to maintain his or her proportionate share of ownership in the firm.