Finance Skills for Managers - D076

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.

Activity Ratios

A category of ratios that measure 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 Covenants

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 owners).

Aggressive Assets

Companies or securities with beta greater than 1.

Annual Percentage Rate

The annual interest rate that is charged for borrowing money or that is earned 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.

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 an organization.

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 product.

Capital

A financial asset that can be used by a firm or individual. Examples of capital may be machinery or cash held by a firm.

Capital Asset Pricing Model (CAPM)

A model used to determine the risk-return relationship for 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 Investment

The sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth.

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 and outflows 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 principal 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 two 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.

Coupon Yield

The stated interest rate of a bond; also known as coupon rate.

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 that dividend sometime in the future before paying any common dividends.

Current Market Value

What someone would pay right now for an asset.

Current Ratio

A liquidity ratio found by current assets divided by current liabilities.

Dealer Market

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

Debt Ratio

A financing ratio found by total liabilities divided by total assets.

Debt-to-equity Ratio

A financing ratios found by total liabilities divided by total equity.

Default

Failure to meet a debt obligation.

Default Risk

The probability of a loss resulting from a borrower’s failure to repay a contractual obligation; also called credit risk.

Defensive Assets

Companies or securities with beta less than 1.

Discount Bond

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 hypothesized 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 Institutions

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 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 Asset Turnover (FAT)

An activity ratio found by sales divided by fixed assets.

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

Generating cash or stock from the sales or IPO of companies in the portfolio of investments.

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 chosen goods and services in an economy increases 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.