FIN 334 Exam I Vocabulary Review

Vocabulary flashcards covering core terms, financial ratios, taxation, corporate forms, market classifications, and asset pricing models for FIN 334 Exam I.

Sole proprietorship

A business owned by one individual.

Partnership

A business owned by two or more people.

Corporation

A legal entity separate from its shareholder owners.

Unlimited liability

A condition where owners' personal assets can be used to satisfy business obligations.

Limited liability

A condition that generally limits a shareholder's loss to the amount invested.

Double taxation

A tax situation where a traditional corporation pays tax on earnings and shareholders may also pay tax on dividends distributed from those earnings.

Agency relationship

A relationship that exists when a principal hires an agent to act on the principal's behalf.

Agency problem

A conflict that arises when managers pursue their own interests instead of shareholders' interests.

Agency costs

Costs including monitoring, incentives, and value lost through conflicting interests.

Intrinsic value

An estimated stock value based on expected future cash flows and risk.

Market price

The current trading price of a security.

Weighted average cost of capital (WACC)

The required return demanded by a company's capital providers.

Primary market

A market where new securities are sold and the issuer receives proceeds.

Secondary market

A market where existing securities trade between investors.

Money market

A market for short-term debt, generally with original maturities of one year or less.

Capital market

A market for long-term debt and equity securities.

Spot market

A market for immediate or near-immediate delivery of an asset.

Futures market

A market where contracts specify transactions or settlement at a future date.

Securitization

The process of pooling financial assets and creating securities backed by their cash flows.

Mortgage-backed security (MBS)

A financial security backed by a pool of mortgages.

Collateralized debt obligation (CDO)

A structured financial product that pools debt instruments and divides claims into tranches with different payment priorities and risks.

Income statement

A financial statement that measures revenue, expenses, and accounting profit over a period.

Balance sheet

A financial statement that measures assets, liabilities, and shareholders' equity at a particular date.

Statement of cash flows

A financial statement that measures operating, investing, and financing cash flows over a period.

Earnings before interest and taxes (EBIT)

Operating profit, calculated as sales minus operating costs minus depreciation and amortization.

Net operating profit after taxes (NOPAT)

A measure of after-tax operating profit calculated without subtracting financing costs, expressed as $\text{NOPAT} = \text{EBIT} \times (1 - \text{Tax rate})$.

Net operating working capital (NOWC)

Operating current assets minus operating current liabilities, excluding short-term investments and notes payable.

Total operating capital (TOC)

The sum of net operating working capital and net operating fixed assets ($\text{TOC} = \text{NOWC} + \text{Net operating fixed assets}$).

Free cash flow (FCF)

Cash available for distribution to capital providers after operating investments, calculated as $\text{FCF} = \text{NOPAT} - \text{Net investment in operating capital}$.

Return on invested capital (ROIC)

A metric that measures after-tax operating profit relative to capital invested in operations, defined as $\text{ROIC} = \text{NOPAT} \div \text{Total operating capital}$.

Economic value added (EVA)

A measure of operating profit after deducting the dollar cost of all capital employed, calculated as $\text{EVA} = \text{NOPAT} - (\text{WACC} \times \text{Operating capital})$.

Progressive tax

A tax system where marginal rates rise across higher taxable-income brackets.

Flat tax

A tax system where the same rate applies across the relevant tax base.

Marginal tax rate

The tax rate applied to an additional dollar of taxable income.

Average tax rate

Total taxes paid divided by taxable income.

Current ratio

A ratio measuring short-term obligation coverage, calculated as $\text{Current assets} \div \text{Current liabilities}$.

Quick ratio

A measure of liquidity without inventory, calculated as $(\text{Current assets} - \text{Inventory}) \div \text{Current liabilities}$.

Days sales outstanding (DSO)

The average collection period for receivables, calculated as $\text{Receivables} \div (\text{Annual sales} \div 365)$.

Diversifiable risk

Company-specific risk (such as product failure or management scandal) that can be reduced through diversification.

Nondiversifiable risk

Market-wide risk (such as economic or interest-rate shocks) that remains in the CAPM stock-portfolio framework.

Stand-alone risk

The risk of an asset held by itself.

Coefficient of variation (CV)

A metric that compares risk per unit of expected return, calculated as $\text{CV} = \text{Standard deviation} \div \text{Expected return}$.

Beta

A measure of sensitivity to market returns and contribution to the risk of a well-diversified portfolio.

Security Market Line (SML)

A graphical line that plots required return against beta (market risk) for individual securities and portfolios.

Capital Market Line (CML)

A line representing efficient combinations of the risk-free asset and market portfolio M, plotted against standard deviation (total risk).

Weak-form EMH

The form of the Efficient Market Hypothesis stating that stock prices reflect past prices and trading information.

Semistrong-form EMH

The form of the Efficient Market Hypothesis stating that stock prices reflect all publicly available information.

Strong-form EMH

The form of the Efficient Market Hypothesis stating that stock prices reflect all public and private information.

Historical beta

A beta calculated by regression of past stock returns on past market returns.

Adjusted beta

A beta calculated as a weighted average of historical beta and 1.0, reflecting a stock's tendency to move toward the market average.

Fundamental beta

A beta estimated from company characteristics related to risk, such as leverage and business characteristics.