Key Terms

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401(k) – a company sponsored tax-deferred retirement savings account named after the IRS code that created it.

Acquisition – a firm or business that is purchased by another entity

Acquisition premium – the difference between a recent pre-acquisition market value and the price paid to acquire a firm.

Acquisition strategy – The practice of growing a company through the purchase of other companies.

Active Fund Management – funds where managers actively evaluate changes to their fund portfolios based on fundamental and/or technical analysis with the expectation of outperforming the market after adjusting for risk. Active management implies there are market inefficiencies that can be exploited for profit.

Additional Funds Needed (AFN) –the amount of new financing determined to be needed in future periods. AFN is typically a plug number needed to make pro forma balance sheets balance. Also called extra funds needed (EFN).

Agency costs – costs incurred to monitor agents and ensure they engage in activities consistent with the desires of the principals.

Agency theory – the study of the relationships that exist between two or more parties with potential conflicts of interest that exist when one party acts as an agent for the other party.

Agent – someone acting on someone else’s behalf.

Analyst downgrade – The lowering of a previous analyst recommendation regarding a particular stock. For example a stock may be downgraded to hold from buy.

Analysts’ estimates – A forecast of a company’s earnings by someone who evaluates companies as a component of their job, typically for investment purposes.

Analysts’ recommendations – professional stock analyst recommendation about whether to buy, sell, or hold specific firm stocks.
Angel Investors – wealthy individuals who invest in business startups. They are often actively involved in the startup firms and provide business advice in addition to financial capital.

Annuity – a series of equal cash flows occurring at equal intervals for a fixed time period.

Antitrust concerns – The Justice department reviews all mergers and acquisitions to ensure that the post-merger firm does not have too much market power. The review may uncover issues or antitrust concerns that can either alter the merger or derail it completely.

Asset-backed bonds – Debt securities with assets pledged as collateral.

Asset-backed security – a financial instrument that has a specific asset or pool of assets pledged as collateral.

Asset expropriation – seizure of assets by a government entity.

Asset sales – The process of liquidating specific divisions and/or firm assets to reallocate resources.

Assets – Tangible or intangible economic resources.

Asymmetric information – when one party has access to information and another party does not have access to that same information.

Bankruptcy – Legal insolvency status a firm may enter to restructure or eliminate debts.

Basis points – one basis point is equal to 1/100th of a percent. In other words, 100 basis points = 1 percent.

Bear market – a bear market is commonly defined as a market decline of 20% or more.

Benchmarking – comparing various metrics with peer groups to evaluate relative performance.

Best efforts IPO – when the investment banking firm or syndicate attempts to get customer commitments to buy the IPO prior to the issue. If enough of the IPO is presold then the issue will occur. If not, the IPO may be cancelled.

Beta – a measure of covariability with the overall market that is used as a measure of risk when an asset is held in a diversified portfolio.

Bird-in-hand theory – the theory that $1 of current dividend income is worth more than an expected future cash distribution.

Board of directors – a group or body elected by the stockholders that provide broad oversight for the firm.

Bond – a financial debt instrument that typically pays a coupon rate of interest and repays the debt at maturity.

Bond coupon rate – stated rate of interest paid on a bond.

Bond covenants – Agreements between a company and bondholders that either require certain actions or prohibit certain actions by a company. Bond covenants are designed to protect bondholders from managerial actions that would reduce the likelihood of repayment.

Bond downgrade – A bond downgrade occurs when a debt rating agency lowers the rating assigned on a firm’s bonds.

Bond funds – mutual funds that invest in fixed income securities that have maturities longer than one year.

Bond indenture – A legal document that spells out all the bond provisions related to a company’s debt and the bondholders.

Bond rating – an assessment of creditworthiness and overall risk that is assigned to a bond by an independent bond rating agency.

Bond rating agencies – Independent agencies that assess a bond issuer’s creditworthiness and assign a rating that reflects default risk.

Bond rating downgrade – occurs when an external rating agency reassesses a bond issuer’s creditworthiness and determines that the default risk has increased.

Bond ratings– a letter grade assigned to a bond by an independent rating agency that represents the default risk of the bond.

Bond yields – the percentage return to an investor if they purchased a bond at the current market price and held it to maturity.

Break-even point – the point where a firm covers all costs. Break-even may be expressed in currency or units.

Bribery –giving money or other compensation with the expectation of altering someone’s behavior in your favor.

Broker –a person or firm that receives a fee or commission for matching buyers and sellers of a good or service.

Bull market – a market characterized by generally rising prices and investor optimism.

Bullish – Investor optimism or the belief that the price of some asset will increase.

Business model – The process a company uses to operate and generate revenue.

Business risk – the possibility of loss due to unique factors relevant to a firm.

Business strategy – Initiatives undertaken by management to direct the overall company’s decision-making to enhance performance and/or increase profits.

Buybacks – a firm repurchasing shares of its common stock.

Buyout – The process of acquiring a majority of a firm’s stock.

Call – a financial derivative that gives the owner the right to buy a specific asset for a specific price prior to some fixed expiration date.

Call option – An option to purchase some asset at a predetermined price within some time period.

Calls – an option to buy 100 shares of a specific stock for a specific price at some point prior to a set expiration date.

Cannibalize – a reduction in sales of existing products that results from the introduction of a new product.

CAPEX– an abbreviation for capital expenditures, or the money a firm has spent on capital budgeting projects.

Capital budget – an amount of money set aside by the firm to be used for new projects.

Capital budgeting – the practice of investing in positive NPV business options.

Capital gains – capital gains are the difference between the current price of an asset and the original purchase price.

Capital intensive – Capital intensity refers to a firm’s level of fixed assets such as property, plant and equipment relative to other variable expenses such as labor.

Capital markets – markets where securities with maturities greater than one year are traded.

Capital requirements – Legal restrictions on the amount of capital a bank must hold in order to meet obligations.

Capital spending – investing in new capital projects that are expected to generate positive NPVs.

Capital structure – a firm’s mix of debt and equity used to finance its assets.

Cash dividends – The distribution of cash to common stockholders on a per share basis.

Cash flows – actual cash inflows and cash outflows for a project or firm.

Cash flow forecasting – The process of estimating expected cash flows from a particular project or firm.

Cash flow streams – Any investment project should be considered a series of cash flows that can then be converted to a present value. The term cash flow stream refers to these project specific cash flows that occur over multiple years.

Cash management – The practice of managing a company’s cash balances in a manner that gives the company sufficient liquidity and still generates the highest possible returns.

CEO – Chief Executive Officer or the highest ranking administrator in a company.

CFO – Chief Financial Officer.

CFO – The CFO is a company’s chief financial officer in charge of all financial functions that typically including accounting and reporting, cash management, raising funds, financial risk management and other financial functions.

Chapter 11 – a type of bankruptcy where debts can be restructured that allows the firm to eventually emerge from bankruptcy as a healthy going concern.

Chief Executive Officer – The CEO is the top level employee in charge of the company’s overall direction and day-to-day management.

Class B shares – A second class of common stock that typically carries less voting rights than Class A shares.

Collateral – Assets pledged as security for a loan.

Commercial paper – The CEO is the top level employee in charge of the company’s overall direction and day-to-day management.

Common dividend – a quarterly cash distribution to common stockholders.

Common stock – a financial instrument that represents fractional ownership in a corporation. Common stock carries voting rights.

Compensation package –the total salary and benefits package available to an employee.

Constant-growth dividend valuation model– this stock valuation model computes the value of the firm by taking the present value of all expected future dividends.

Constant growth model – a common stock valuation model that uses the present value of all expected future dividends to determine value.

Convertibility – the ability to convert a bond or preferred stock into shares of common stock.

Convertible bonds – A debt instrument with a maturity greater than 10 years that can be converted to a fixed number of shares of common stock at some point during its life.

Convertible notes – A medium term debt instrument that can be converted to the issuing company’s common stock at the option of the holder at some predetermined value.

Conversion value – The value of a convertible debt instrument if it were converted to common stock and sold.

Corporate bonds – Debt instruments issued by corporations to finance investments and/or operations.

Corporate ethics – The moral stance or position of a company. It includes answering the question of whether something is “good” or “bad” instead of merely “will it add to shareholder wealth?”

Corporate governance – a set of rules and procedures that ensure the corporation engages in appropriate and ethical behavior.

Corporate insiders – Typically high level officers, employees, or large shareholders that may have access to information not available to the general public.

Corporate raider – An investor who acquires a large amount of a firm’s stock in order to exert influence over the firm or acquire control.

Correlation – the manner in which two variables move together. In this case we are referring to the cash flows of two different businesses.

Cost of Capital – typically refers to the weighted average cost of capital which refers to the firm’s minimum percentage required return on invested capital.

Country correlation – A correlation coefficient that measures the historical relationship between economic conditions, or currencies, of two countries.

Coupon rate – the stated interest rate paid as a percentage of a bond’s par value.

Credit – A loan from one party to another with the expectation of repayment.

Credit default swaps – A financial derivative that is essentially default insurance on a bond.

Credit downgrade – Occurs when one of the credit rating agencies reduces a debt rating as a result of the rating agency’s assessment of an increased likelihood of default.

Credit rating agency – An independent firm that assesses risks associated with new and outstanding debts and assigns ratings designed to indicate creditworthiness.

Credit ratings – Letter grades assigned to debt, and issuers of debt, that indicate creditworthiness.

Credit risk – The risk of loss due to nonpayment of a debt or obligation.

Credit watch or watch list – A list of debts that are in danger of being downgraded.

Cumulative Dividends – when preferred stock dividends are cumulative it means any skipped dividends must be paid before a firm pays a common stock dividend.

Currency appreciation – if one currency increases in value relative to another currency it is said to appreciate.

Currency correlation – The relationship between two currencies is known as currency correlation. A currency correlation coefficient is generated from historical data and provides a measure of how closely the two currencies moved together in the past.

Currency depreciation – when a currency declines in value relative to other currencies.

Currency futures – A standardized contract that allows an entity to buy or sell a specific amount of a currency at a specific price with a specific delivery date.

Currency risk – the possibility of loss associated with foreign currency movements.

Currency translation – the accounting process of converting all income, assets and liabilities denominated in a foreign currency to the home currency of a corporation for financial reporting purposes.

Current assets– Those assets that can be converted to cash within one year or one operating cycle.

Date of record – Date at which the owner of record is established for the next dividend payment.

Debenture – Unsecured debt that is backed only by faith in the issuer (i.e. debt with no collateral attached or pledged).

Debenture bond – An unsecured debt instrument (bond).

Debt covenant – Agreements between a firm and its creditors designed to keep the firm operating in a manner that ensures repayment of the debts. Most covenants require the firm to maintain certain liquidity and debt targets.

Debt restructuring – refers to changing the fraction of debt or altering the terms of debt.

Debt service – The amount of cash needed to pay current debt commitments which may be interest-only, or interest and principal on some loans.

Debt tax shield – reduction in tax liability due to the use of debt.

Default risk – default risk is also known as credit risk and is the likelihood that the borrower will not repay the loan.

Delisting – the process of losing or giving up a listing on an organized stock exchange.

Derivative – a financial security that has its value derived from the value of an underlying asset.

Dilution– a decrease in ownership fraction due to additional shares being issued.

Direct quote – The number of units of home currency needed to buy one unit of a specific foreign currency.

Discount – A reduction in the price of an asset. Debt selling at a discount is selling at less than face value.

Discounted cash flow techniques – a set of techniques used to convert all cash flows to the present in order to properly evaluate a project.

Discount rate – The interest rate used to calculate the present value of a series of cash flows.

Discretionary financing – funds that the firm directly obtains via borrowing from a bank or selling debt and equity to investors. Firms must take explicit action to obtain discretionary financing.

Diversification – the process of combining assets that are less than perfectly positively correlated in order to increase returns and/or reduce risk.

Diversifiable risk – the risk that can be eliminated through diversification. This risk is also call unsystematic risk.

Divestiture – The process of selling a business, a business unit or division.

Dividends – Distribution of cash or equity to shareholders.

Dividend clientele – the premise that firms attract different types of investors (i.e. clienteles) based on their dividend policy.

Dividend distribution – A per share payment of cash to shareholders of record.

Dividend payout ratio – the fraction of net income that is paid out in dividends.

Dividend policy – the firm’s guidelines related to the fraction of earnings distributed to shareholders.

Dividend signaling – the theory that a firm’s management signals information about the firm’s future earnings via changes in dividend policy.

Dividend smoothing – the policy of maintaining a relatively constant dividend payout.

Dividend yield – The most recent dividend (annualized) divided by the current share price.

DJIA – Dow Jones Industrial Average is a stock market index comprised of 30 large blue chip stocks.

Dual-class shares – occurs when one firm issues two distinct types of common stock. Often these shares are dubbed Class A and Class B shares.

Due diligence – investigating the financial status of an asset to ensure claims made by the potential seller are accurate.

Earnings per share (EPS) – The fraction of a company’s after-tax profits allocated to each share of common stock.

Economies of scale – Achieving lower unit costs by increasing output in order to spread fixed costs over more units of production.

Efficiency – Producing a product at the lowest possible cost

Efficient markets – Markets where the price of an asset reflects all available information about that asset.

Efficient Markets Hypothesis (EMH) – The efficient markets hypothesis maintains that an asset’s price reflects all known information about that asset.

Emerging markets – Countries or markets in the process of rapid growth and development.

Equity – Ownership interest in some asset.

ETF – exchange traded funds. Professionally managed funds that function much like a mutual fund except they can be traded throughout the day in the same manner as a stock. Many ETFs are designed to mimic a specific market index or sector.

Ethics – a moral philosophy or moral code.

Ethical behavior – Acting in a moral manner consistent with societal norms.

Eurodollar bonds – a dollar denominated bond issued outside the U.S.

Event study – A statistical method used to determine whether a particular event has an impact on stock price. This method is often used to test market efficiency. In an efficient market new relevant information should immediately impact share price.

Exchange rate risk – The risk associated with the impact of fluctuating exchange rates on a firm’s cash flows.

Executive stock options – the right to purchase a firm’s stock at a specific price granted to management to provide incentive to maximize shareholder wealth.

Exit strategy – a preplanned way of liquidating your investment in a start-up.

Expansion project – An investment that results in increased output for an existing product.

Expectations – what we believe to be the most likely outcome.

Expected cash flows – A firm’s forecast of cash flows to be received over some future

External financing needs – also known as additional funds needed (EFN or AFN). The amount of money a firm has identified through financial forecasting that must be raised from an external source.

FDI – foreign direct investment occurs when a firm located in one country acquires assets in another country time period.

Fed – The Federal Reserve, the central bank of the United States, is commonly known as the Fed.

Fed funds rate – the interest rate that banks charge each other for overnight loans.

Federal Open Market Committee – , a 12-member Federal Reserve committee that consists of the 7 members of the Board of Governors and five additional members pulled from the pool of presidents of the 12 Federal Reserve Banks. The president of the New York Fed always sits on the committee plus four other Fed presidents that rotate through the committee. The FOMC is the primary body charged with conducting monetary policy.

Federal Reserve – the central bank of the United States that is in charge of the nation’s monetary policy.

Financial assets – any asset that represents a claim on some future cash flow or cash flow stream.

Financial derivative – a financial instrument that has its value derived from the value of an underlying asset.

Financial distress – a financial condition where a firm cannot meet its debt obligations.

Financial forecasting – estimating future cash inflows and outflows in order to plan for any financing needs.

Financial manager – A person that deals with the financial aspects of the firm. The financial should make decisions consistent with shareholder wealth maximization.

Financial markets – Markets where investors buy and sell financial assets such as stocks, bonds and derivative securities.

Financial planning – The process of forecasting cash inflows and outflows and identifying sources of funds to cover forecast shortfalls, and investment options for anticipated surpluses.

Financial risk – the potential for financial loss.

Financial strategy – Practices and policies used to achieve financial objectives.

Firm Commitment – A firm commitment IPO is when the underwriters buy the issue outright with the intent of reselling the stock to investors.

Firm Commitment IPO – a firm commitment IPO occurs when the investment banker purchases the issue outright from the firm to sell to investors. The investment banker assumes the risk of resale.

Firm specific risk – the risk associated with the individual firm.

Fitch ratings – One of the three major credit rating agencies.

Fixed Costs – costs that do not vary with output.

Floating-rate notes – intermediate term bonds that pay variable coupon rates that are indexed to some other market determined interest rate.

Forecasting – the process of forming expectations about the value of some variable, or the likelihood of some event occurring, in the future.

Forecast cash flows – The expected cash flows that a particular investment should generate.

Forecasting cash flows – Making predictions about future cash flows based on the best available information.

Foreign exchange – the process of exchanging one currency for another.

Foreign exchange market – The process of exchanging one currency for another currency.

Foreign exchange risk – the risk associated with foreign exchange movements that will reduce an investor’s return simply due to currency fluctuations.

Foreign-currency translation – The accounting practice of converting foreign currencies into a home currency for reporting purposes.

Foreign exchange risk – the possibility of financial loss due to adverse currency movements.

Free cash flow – Cash flow available for distribution to a firm’s security holders.

Fully subscribed – When an IPO has enough investors to purchase the entire offering in advance it is known as fully subscribed.

Future value – the value of an asset at some future date.

Futures contract – a standardized contract to buy or sell some commodity at some point in the future.

General obligation bonds – municipal bonds that have the issuer’s pledge to use any legal means, including raising taxes, to service the debt and repay the bond issue at maturity.

Golden parachute – a generous severance package awarded to top management to incentivize them to entertain acquisition offers that might result in their job loss.

Goodwill – An accounting term that quantifies the intangible value of a particular asset such as a company’s reputation or brand.

Gordon Growth Model – a stock valuation model where the value is equal to the present value of all future expected dividends.

Greenfield Investments – a form of FDI where a firm constructs a facility from the ground up instead of acquiring an existing facility.

Greenmail – a takeover defense where the firm pays a premium to acquire the shares of stock owned by a potential corporate raider.

Hedge –taking a position using a financial instrument that will reduce the risk of adverse price swings of some commodity.

Hedge fund – an investment fund that is open only to accredited investors.

Hedging – engaging in some activity designed to offset or mitigate a risk.

High-yield bonds – bonds that are higher risk and therefore pay a higher coupon rate of return.

Holding period return– this return is the total return an investor earned over the life of a particular investment. It can be expressed as a percentage return, or in dollar terms.

Horizontal merger – a merger between two firms in the same industry.

Hostile takeover – the acquisition of a firm when the acquired firm’s management is opposed to the acquisition.

Incentive compensation – Remuneration designed to provide incentive to achieve some corporate goal which is typically to increase shareholder wealth.

Incentive payments – payments made when some objective is achieved.

Incremental cash flows – any cash flow that will only change if an investment is undertaken.

Indenture– a legal document containing all provisions and covenants related to the firm’s outstanding bonds or debt.

Independent board members – independent board members do not own shares of stock in the firm or have any other material relationship with the firm.

Initial outlay – today’s price, or cost, to invest in a specific project.

Initial Public Offering –the process of selling stock to the public for the very first time.

Inside information – Information that is not publicly available.

Insider trading – Market activity undertaken with inside knowledge, or knowledge that investors not on the “inside” would be unable to access.

Insurance – A transfer of risk from one party to another in exchange for payment.

Institutional investors – large fund management investors such as mutual funds, hedge funds, pension funds, etc.

Intangible assets – any asset that is not physical in nature. Intangibles include patents, copyrights, goodwill, trademarks, etc.

Intellectual property – Intangible assets that may include copyrights, patents, trademarks, etc.

Interest tax shield – the reduction in income taxes resulting from the tax deductibility of interest payments.

Internal rate of return – The interest rate that makes the NPV equal to zero.

Internal controls – A set of systems or processes that aid in decision-making and monitoring a firm’s activities. Many internal control systems are designed to identify and prevent fraudulent activity.

International acquisition – Acquiring assets that are in country other than a firm’s corporate base of operations.

International expansion – Entering markets other than the domestic market either through exporting, partnering, direct foreign investment, or some other means.

Intrinsic value – The true or actual value of some asset.

Inventory – Product or raw materials/components held for the purpose of supporting sales or manufacturing.

Inverted yield curve – a yield curve that is downward sloping and to the right indicating that yields decrease as maturity increases.

Investment bank – investment banks handle new equity issues for clients. In most cases they purchase the IPO from the issuer and then resell it to their clients.

Investment bankers – Financial services firms that help firms raise capital via either debt or equity issues.

Investment grade bonds – the top four categories of bonds that have a low risk of default.

Investment grade debt – debt that is rated BBB or higher by Standard & Poor’s Ratings Services.

IPO – an initial public offering occurs when a firm sells stock to the public for the very first time.

IPO insurance – Insurance sold to a company that protects the firm, investment bankers, and various company executives against legal action by investors claiming mistakes or misrepresentation of facts in the prospectus or marketing materials.

IRA – individual retirement accounts that are tax-deferred savings vehicles.

IRR – the internal rate of return (IRR) is the discount rate that makes the initial outlay equivalent to the present value of the project’s cash flows.

Joint venture – a business that is developed and owned by two or more entities.

Junior Debentures – unsecured corporate debt that is subordinate to at least some of the firm’s other debt issues.

Junk Bonds – Bonds that are rated below investment grade and therefore have a higher likelihood of default.

LBO Leverage buyout. – An LBO occurs when an investor, or investment consortium, takes a controlling interest in a firm by using high levels of debt to purchase outstanding shares of stock.

Lead underwriter – an investment banker that organizes an IPO.

Leverage – debt is often referred to as leverage since it will lever, or magnify, returns to the owners as long as the funds are invested in assets that generate higher returns.

Liar loans– loans made by lenders without income verification of applicants. These loans provide incentive for some applicants to overstate income in order to be approved.

LIBOR – London Interbank Offer Rate.

Liquidity – Cash or the ability to rapidly convert to cash without significant loss of value.

Liquidity preference theory – the theory that states that investors must receive additional compensation in the form of higher interest rates to give up liquidity (i.e. buy longer term bonds).

Listed – the process where a firm becomes publicly traded and available for investors to buy or sell on a specific stock exchange.

Listing – the process of obtaining permission for a firm’s stock to be bought and sold on a specific stock exchange.

Listing requirements – a series of financial and ownership guidelines that must be met prior to becoming listed on a specific stock exchange.

Loan extension – The process of extending the maturity date of a debt. In most cases loan extensions are used when a firm needs more time to repay and a creditor believes that repayment is ultimately possible.

Loan guarantee – An agreement by one party to repay a debt in the event the borrower defaults.

Loan-to-value ratio – A ratio that represents the total loan amount as a percentage of the value of the loan’s security or collateral.

Logistics – management of the flow of goods from one point to another.

M&A – Mergers and acquisitions. The process of combining with another firm, or the outright purchase of another firm. This activity is collectively known as M&A.

MNC – Multinational corporation

Market capitalization – The total market value of a firm’s equity.

Market efficiency – Markets are efficient when the price of an asset accurately reflects the asset’s true value at any point in time.

Market imperfections – taxes, transaction costs, asymmetric information and other limitations that increase the costs of buying and selling, or impede transactions in some way.

Market index – the belief that a manager or investor can select the appropriate time to enter or exit a market that maximizes returns.

Market timing – the belief that a manager or investor can select the appropriate time to enter or exit a market that maximizes returns.

Merger – The combining of two or more firms into a singe entity

Monetary easing – Monetary easing, or quantitative easing, is the central bank practice of buying financial assets to increase the money supply and stimulate growth.

Money markets – Short term credit markets that are one-year or less in maturity.

Mortgage bonds – Bonds that have some specific asset pledged as collateral.

Municipal bonds – Debt issued by a city, state or municipality.

Mutual funds – an investment vehicle that solicits monies from investors and in turn invests those monies in financial assets on their behalf.

Negative outlook – an indication by a bond rating agency that a bond is likely to be downgraded.

Negative-yield bonds – Bonds that generate a negative return (i.e. guaranteed loss) to investors if bought at the current price and held to maturity.

Net income – Revenue minus all expenses; often referred to as profit or the bottom line.

Net present value – the process of discounting expected future cash flows back to the present and then subtracting out the initial outlay required for the investment. A positive NPV indicates the project should be accepted.

Net working capital – Defined as current assets minus current liabilities.

Non-cash charge – a charge against earnings that does not require a cash outlay. However, the charge does lower earnings.

Normal yield curve – a yield curve that is upward sloping and to the right indicating that yields increase as maturity increases.

Notes – Intermediate term debt that is one to ten years in maturity.

NPV – the net present value (NPV) is an investment evaluation tool that converts all project cash flows to today’s dollars.

NYSE – New York Stock Exchange which is a physical market where certain stocks are bought and sold.

Offer price – the initial selling price established by the underwriters for a firm’s stock in the primary market.

Open-market desk – the operational branch of the Fed in charge of buying or selling bonds on the open market.

Open market operations – the practice of the Fed entering the market and buying or selling U.S. government Treasury securities.

Open market repurchase – buying the stock in the market in the same manner that other investors buy and sell on organized exchanges.

Operating losses – losses attributed to the firm’s business operations.

Operating margin – a measure of a firm’s profitability from operations.

Optimal capital structure – the mix of debt and equity that minimizes the firm’s weighted average cost of capital (WACC) and therefore maximizes shareholder wealth.

Options – a derivative security that gives the owner the right to buy (i.e. call option) or sell (i.e. put option) an asset for a specific price within a specific time period.

Organized exchanges – either a physical location, or an electronic network, where financial securities are bought and sold.

Oversubscribed – when an IPO has more demand for shares at a certain price than are available for sale.

Overvalued – When an asset reaches a price that is not supported by the underlying fundamentals.

Ownership dilution – a shareholder’s reduction in fractional ownership that can occur when new equity is issued.

P/E ratio –a common financial ratio that is computed as price divided by earnings.

Panda bond – A yuan-denominated bond issued in China by a non-Chinese firm.

Par value – the face value of a bond, typically $1,000.

Passive fund management – funds that are designed to mimic or mirror a particular market index. Managers only alter the portfolio composition when the index changes composition.

Patent – a legal protection that gives patent holders exclusive 20-year rights to a particular product or process.

Payback period – the number of years required to recover a project’s initial investment.

Payout policy – The manner in which a firm determines and distributes dividends paid to shareholders. Most firms follow a similar model from year to year in order to limit uncertainty.

Payout ratio – The percentage of earnings paid out in the form of a cash dividend.

Pensions – A plan designed to provide retirement income to former employees.

Percent-of-sales forecast – method of forecasting that uses previous year balance sheet and income statement data and assumes the individual items will be approximately the same fraction of either assets or sales as the previous year.

Performance based pay – compensation that is tied to some performance metric such as earnings or stock price.

Perpetuity – a cash flow stream that does not have a maturity.

Perquisites – often shortened to perks but includes additional benefits awarded to top executives. Company jets, high-end apartments, and country club memberships are examples of common perks.

Plowback ratio – the fraction of earnings reinvested in the firm.

Poison pill – Actions taken by a firm’s management that are designed to make a company less attractive to other firms. Debt clauses that require immediate debt repayment in the event of a merger or takeover are one example of a poison pill.

Political risk – the potential for loss due to government actions or instability in a country.

Portfolio – A group of investments or businesses.

Preferred Shares – shares of ownership that receive a fixed dividend and typically carry no voting rights. Preferred stock receives preference over common stock in the event of dividend distribution and liquidation proceeds.

Preferred Stock – equity issued by a corporation that receives preference over common stock in the event of bankruptcy (i.e. distribution of liquidation proceeds) and also with regard to dividend distributions.

Present value – the value in today’s dollars of a cash flow or series of cash flows.

Present value of an annuity – the value today of a series of future cash flows.

Price/earnings multiple – The current market price divided by the most recent earnings per share. This ratio often gives some indication of investor enthusiasm about a company.

Price-to-earnings ratio – A financial ratio that is calculated by taking a current market price for a share of stock and dividing by the most recent annual earnings. This ratio can be used in a number of ways but is often used to identify undervalued firms that are selling at earnings multiples below historic standards.

Primary market – the market where IPOs are issued.

Primary markets – The market where new securities are sold to investors. This is the only time the issuing firm will receive proceeds from the sale.

Principal – the owner, or someone who has an agent acting on their behalf.

Principal agent relationship – the relationship between an owner (principal) and someone working on their behalf (agent).

Private equity – a direct investment into a firm not publicly traded or funds invested to take a public company private.

Private equity firm – a firm that makes direct investments into private companies, or purchases public companies and takes them private.

Private information – information not available to the general public.

Pro forma financial statements – forecasted financial statements for future periods.

Pro forma financials – Expected future financial statements based on anticipated revenues.

Production capacity – The maximum amount of product that can be manufactured given the existing resources.

Profit margin – a financial ratio computed by net income divided by sales.

Profits – Typically defined as net income or income after taxes.

Project cash flows – The cash inflows and outflows associated with a specific project.

Project evaluation – the process of valuing a business investment, or investment project.

Prospectus – a printed document that provides details about a firm and a forthcoming IPO.

Proxy votes – occurs when a shareholder delegates someone else to cast their votes.

Public information – information that is readily accessible to anyone.

Purchasing efficiencies – Lowering input costs by strategic buying. Efficiency can often be gained through higher volume or buying inputs located in closer proximity to the production facilities.

Pure expectations theory – the theory that the current shape of the yield curve can be explained by expectations of future interest rates.

Put – an option to sell 100 shares of a specific stock for a specific price at some point prior to a set expiration date.

Put option – the right to sell 100 shares of a specific stock for a specific price prior to some specific future expiration date.

Puts – a financial derivative that gives the owner the right to sell a specific asset for a specific price prior to some fixed expiration date.

Quantitative easing – expansion of the money supply that occurs when a central bank enters the market and purchases financial assets.

R & D – research and development.

R&D budget – An amount of money set aside for research and development of new products.

R & D investments – planned spending on research and development.

Redundancy in operations – two or more departments performing the same function.

Refinance – Replacing one debt obligation with another debt obligation with different characteristics in terms of maturity, interest rates, etc.

Refunding – The process of issuing a bond for the purpose of retiring an existing bond that is typically higher interest or has more restrictive covenants.

REIT – Real estate investment trust. REITs are investment companies specializing in real estate and real estate mortgages.

Repatriation – the process of returning foreign earnings to a firm’s home country.

Repatriation of earnings – the practice of remitting foreign earnings back to the domestic firm’s corporate headquarters.

Repatriation of funds – The process of bringing monies from foreign operations back to the domestic country. Repatriation involves converting foreign currencies to the domestic currency.

Retention ratio – The fraction of earnings that a firm retains. Equivalent to 1 minus the dividend payout ratio. Also called the plowback ratio.

Research and development – an investment by a firm that is designed to identify new products or product improvements.

Residual dividend policy – the practice of using all internally generated funds to invest in positive NPV projects first and then distributing any residual cash to shareholders as a dividend.

Restructuring – the process of modifying a firm’s debt, operations, or overall business structure.

Reverse stock split – This procedure is the opposite of a stock split. In a 1-for-2 stock split an investor with 100 shares would have 50 shares after the split but the value of each remaining share should be twice what it was prior to the split. Note that the value of the ownership should remain unchanged.

Revolving line of credit – a pre-established loan that allows a firm to borrow up to some pre-set limit without additional loan paperwork. It functions in the same manner as a credit card with a pre-set limit.

Rights offer – an offer that entitles existing shareholders to purchase stock directly from the company in an amount that will allow them to maintain their same fractional ownership.

Risk – the likelihood that an outcome will be different than expected.

Risk adjusted discount rate (RADR) – A risk adjusted discount rate is a project rate of return that has been increased to adjust for higher risk projects or lowered to adjust for lower risk projects. This RADR is then used to calculate the present value of a project’s cash flows.

Risk-adjusted returns – Adjusting returns by some metric of risk in order to make accurate risk-return comparisons.

Risk aversion – the tendency to avoid taking risk unless compensated for it.

Risk-based capital standards – rules that dictate that bank capital requirements be based on the riskiness of their asset portfolio.

Risk return tradeoff – the principle in finance that maintains investors will demand higher returns for higher risk investments.

Risk assessment – the practice of estimating the level of risk associated with some event.

Risk management – The process of identifying threats, or potential negative events, and taking steps to minimize the impact of these events on the firm.

Risk premiums – The additional return required by investors to assume higher levels of risk (i.e. buy higher risk securities).

Road show – the practice of a firm’s management touring the country meeting with institutional investors to generate interest in the firm’s equity issue.

ROE – return on equity computed as net income divided by common equity.

S & P 500 – The Standard and Poor’s 500 is a market index comprised of 500 large cap U.S. stocks.

S&P 500 index – a stock market index comprised of 500 large prominent firms. The S&P 500 is often used to benchmark performance of mutual funds or other portfolios.

Sales forecast – an estimate of what revenues, or sales, will be in the future.

Scenario analysis – a method of project evaluation where a financial manager determines the best-case, base-case, and worst-case outcome by varying input costs and output prices simultaneously.

Seasoned equity issue – the process where a firm that is already publicly traded sells additional equity.

Seasoned equity offering –when a firm that is already publicly traded sells additional stock.

SEC – Securities Exchange Commission, or SEC, is the regulatory agency established to enforce financial securities laws.

Secondary markets – the organized stock exchanges where stock is traded among investors. Some examples of the secondary market are the organized stock exchanges such as NYSE.

Secured bond– debt with specific collateral pledged against repayment.

Securitization – The practice of pooling a particular type of debt and issuing new debt securities that represent a fraction of that pool.

Segmented Markets theory – the theory that postulates the shape of the yield curve is due to the supply and demand for a specific maturities of debt.

Semi-strong form market efficiency – a semi-strong form efficient market is one where the current price of an asset reflects all publicly available information.

Semi-strong form EMH – The semi-strong form of the efficient markets hypothesis maintains that an asset’s price reflects all publicly available information about that asset.

Senior debt – Debt that has priority over other debt claims in the event of financial insolvency.

Sensitivity analysis – Estimating the sensitivity of cash flows to changes in key variables. In this example fuel prices are a key variable.

Share buyback – the process where a firm repurchases shares of its own stock.

Shareholder activism – the process whereby stockholders influence a firm’s behavior by exercising their rights as owners of the firm.

Shareholders – Stockholders or entities with equity ownership.

Shareholder wealth maximization – The primary goal of the firm which is synonymous with maximizing stock price.

Share repurchase – The practice of a company buying back shares of its own stock.

Short sales / Short selling – Selling assets borrowed from someone else with the intention of buying identical assets later at a lower price and replacing the borrowed assets.

Short-term financial planning – Forecasting and financial decision-making typically involving the next one or two operating cycles.

Short-term investments – Very short term securities corporations often purchase to earn at least a minimal return on cash balances while remaining liquid.

Simulation analysis – a computer simulation where managers specify input and output price ranges and determine the likelihood of a positive outcome by making thousands of computer iterations with various combinations.

Smart beta strategy – a passive portfolio construction strategy that attempts to take advantage of market inefficiencies by using alternative weighting schemes based on volatility, dividend payments, or other criteria.

Social responsibility – The principle that a corporation should focus on increasing society’s overall welfare in addition to maximizing shareholder wealth.

Sovereign debt – debt that is issued by a national government.

Special cash dividend – a one-time only cash disbursement that is not recurring like regular dividends.

Special dividends – one-time non-recurring dividends distributed by the firm to shareholders.

Speculative grade debt – Debt that is rated below investment grade by the major credit rating agencies.

Spinoff – the creation of an independent firm via the issue of new shares of a business division.

Spin-out – A type of divestiture where the parent company takes a division and creates a separate company with its own stock. Current owners are given the same pro rata share of ownership in the spin-off company.

Spontaneous financing – funds obtained from using trade credit and accounts payables that are automatically generated as a course of doing business.

Spontaneously generated liabilities – liability accounts such as accounts payable and accruals that automatically increase as sales increase.

Spread – The difference between the risk-free return and some other risky return.

Stakeholder – stakeholders include bondholders, stockholders, clients and customers, employees, suppliers, etc. It is a broad term that indicates anyone with a relationship with the firm.

Standard deviation – A measure of risk commonly used when populations are normally distributed. Standard deviation is a measure of dispersion around the mean that provides some indication of past volatility.

Stock – A pro rate share of ownership in a company.

Stock buyback – the process of a firm repurchasing shares of its own stock.

Stock Exchange – An entity where stocks and other financial securities are bought and sold.

Stock price reaction – When the market price of a stock moves up or down based on the release of new information.

Stock repurchase – The process of a firm buying some of its own stock from investors.

Stock split – Splitting a stock involves exchange existing shares of common stock for a larger number in order to get the trading price in a lower range. For example a firm may elect to engage in a 2-for-1 stock split when the current market price is $100 a share. After the split an investor previously owning 60 shares worth $100 each would now own 120 shares that should now be selling for $50 each. Note that the value of the investment is still $6,000.

Stock valuation – The process of calculating a value for a share of stock in order to make an investment decision.

Stock valuation multiples – methods used to value stock that value the firm as a multiple of sales, earnings, or some other metric based on the value of comparable firms in the same industry.

Strategic acquisitions – An acquisition made because it fits the long-term strategy of a firm.

Strong form market efficiency – a strong form efficient market is one where the current price of an asset reflects all publicly available information and all private information.

Structural change – A long-term permanent fundamental shift that radically alters an industry or economy.

Subordinated debt – Debt that does not have a primary claim on assets in the event of bankruptcy (i.e. other debt ranks above subordinated debt).

Subordinated notes – bonds with intermediate maturities that have a lower claim on assets in the event the firm defaults.

Subprime debt – debt issued by higher risk borrowers that pays a higher interest rate to compensate investors for the higher risk.

Sunk costs – costs that once incurred cannot be recovered.

Synergies – synergies occur when two or more firms combine and the output of the combined firm is greater the sum of the pre-acquisition combined output.

Synergy – the concept that the whole is greater than the sum of the parts. For example, the post-merger firm could be worth more than the sum of the pre-merger firms.

Takeover – The process of acquiring a controlling interest in another firm through purchasing outstanding shares..

Takeover bid – An offer to purchase enough shares of a company’s stock to gain control of the firm.

Takeover defense – any action taken to make a firm less attractive to potential investors that would like to gain control of the firm.

Target takeover – a firm that possesses attributes that make it an attractive potential acquisition for other firms.

Tax management – the practice of taking advantage of legal provisions in the tax code in order to minimize tax liability for a given level of income.

Tax shield – the financial benefit received due to interest expense being tax deductible.

Tender offer – an offer to purchase some, or all, of a firm’s stock from shareholders. The offer is typically at a premium above current market price.

Term structure of interest rates – The relationship between yield and time to maturity of debt securities, typically U.S. Treasuries.

Time value of money – a seminal concept in finance that says the timing of the receipt of a cash flow impacts the value.

Trading at a discount – a bond selling for less than par value.

Treasuries –refers to U.S. government issued bills, notes and bonds since they are issued by the U.S. Department of the Treasury to fund deficit spending and roll over old debt.

Treasury bond –U.S. government debt with a fixed coupon rate and initial maturities greater than 10 years.

Treasury debt –Debt issued by the United States Treasury.

Treasury notes –U.S. government debt with a fixed coupon rate and initial maturities between one and ten years.

Treasury stock – stock that the firm has repurchased, or that was never issued, is carried on the books as treasury stock.

Undervalued – The premise that some asset is selling for a price below its true value.

Underwriters – Typically a syndicate of investment banks that buy a security issue with the expectation of resale or that place the issue with investors.

Underwriter – Investment bankers that coordinate and sell initial public offerings. In many cases these banks purchase the equity and then turn around and sell it to their network of investors in the IPO.

Underwriting syndicate – A group of investment bankers that collectively sell a predetermined fraction of an initial public offering.

Uneven cash flow stream – a series of cash flows that differs from one period to the next.

Unexpected EPS – The portion of EPS that differed from consensus forecasts.

Unrated debt – debt that has not been submitted to an independent debt rating agency to rate creditworthiness.

Unsecured creditors – A lender or creditor that does not have assets pledged to secure the loan.

Unsecured senior notes – intermediate term fixed income securities that do not have any assets pledged as collateral but do have first claim on assets with respect to other unsecured bondholders in the event of financial insolvency.

U.S. Treasury bonds – Long-term debt instruments issued by the U.S. government.

Valuation – the market value of some asset.

Valuation multiples – a way to value a firm based on comparable industry multiples such as a P/E multiple or price-to-sales multiple.

Variable costs – costs that vary as output varies.

Variability – An assessment of volatility or the likelihood of difference from the mean or norm. In finance higher variability is synonymous with higher risk.

Venture capital – Start up or early business financing provided to young companies by investors.

Vertical merger – A merger between two companies producing different components of the same finished product.

Volatility – price changes for a specific asset.

Voting rights – each share of common stock owned gives the stockholder the right to vote on board members charged with oversight of the firm.

WAAC – the weighted average cost of capital based on the current capital structure and the component costs.

Weak form EMH – the form of efficient markets hypothesis that maintains the current price of an asset reflects all information contained in past prices.

Weak form market efficiency – markets are said to be weak form efficient if the current price of an asset reflects all information contained in past prices.

Whistle blower – a person who exposes misconduct or unethical behavior.

White knight – a friendly investor that is sought out by management to acquire the firm as an alternative to the firm or individual attempting a hostile takeover

Worker buyout – an incentive package offered to current employees to encourage them to quit the firm or retire early.

Writedown – the process of reducing the book value of an asset due to a decline in the asset’s market value.

Yield curve – Graphical representation of the term structure of interest rates.

Yield spreads – the difference between two different interest rates. The yield spread or gap could be based on differences in maturity or risk.

Yield to maturity – the percentage return earned if an asset with a fixed maturity date is purchased at the current price and held until maturity.

YTM – Yield to maturity, or the annual interest rate an investor would earning purchasing a debt security and the current market price and holding it until it matured.

Zero coupon bonds – Bonds that do not pay interest but instead sell at a discount and will be redeemed at face value upon maturity.