ABC inventory system: Inventory management technique that divides inventory into
three groups--A, B, and C, in descending order of importance and level of
monitoring, on the basis of the dollar investment in each. (Chapter 14)
ability to service debts: The ability of a firm to make the payments required on a
scheduled basis over the life of a debt. (Chapter 2)
accept-reject approach: The evaluation of capital expenditure proposals to
determine whether they meet the firm's minimum acceptance criterion. (Chapter
8)
accounting exposure: The risk resulting from the effects of changes in foreign
exchange rates on the translated value of a firm's financial statement accounts
denominated in a given foreign currency. (Chapter 18)
accounts payable management: Management by the firm of the time that elapses between its
purchase of raw materials and its mailing payment to the supplier. (Chapter 15)
accrual basis: In preparation of financial statements, recognizes revenue
at the time of sale and recognizes expenses when they are incurred. (Chapter 1)
accruals: Liabilities for services received for which payment has yet
to be made. (Chapter 15)
ACH (automated clearinghouse)
transfer: Preauthorized electronic withdrawal
from the payer's account and deposit into the payee's account via a settlement
among banks by the automated clearinghouse, or ACH. (Chapter 14)
acquiring company: The firm in a merger transaction that attempts to acquire
another firm. (Chapter 17)
activity ratios: Measure the speed with which various accounts are converted
into sales or cash--inflows or outflows. (Chapter 2)
after-tax proceeds from sale of old
asset: The difference between the old
asset's sale proceeds and any applicable taxes or tax refunds related to its
sale. (Chapter 8)
agency costs: The costs borne by stockholders to minimize agency
problems. (Chapter 1)
agency problem: The likelihood that managers may place personal goals ahead
of corporate goals. (Chapter 1)
aggressive funding strategy: A funding strategy under which the firm funds its seasonal requirements
with short-term debt and its permanent requirements with long-term debt.
(Chapter 14)
aging of accounts receivable: A credit-monitoring technique that uses a schedule that
indicates the percentages of the total accounts receivable balance that have
been outstanding for specified periods of time. (Chapter 14)
all-current-rate method: The method by which the functional-currency-denominated
financial statements of an MNC's subsidiary are translated into the parent
company's currency. (Chapter 18)
American depositary receipts (ADRs)
: Claims issued by U.S. banks
representing ownership of shares of a foreign company's stock held on deposit
by the U.S. bank in the foreign market and issued in dollars to U.S. investors.
(Chapter 7)
angel capitalists (angels) : Wealthy individual investors who do not operate as a
business but invest in promising early-stage companies in exchange for a
portion of the firm's equity. (Chapter 7)
annual cleanup: The requirement that for a certain number of days during the
year borrowers under a line of credit carry a zero loan balance (that is, owe
the bank nothing). (Chapter 15)
annual percentage rate (APR) : The nominal annual rate of interest, found by
multiplying the periodic rate by the number of periods in 1 year, that must be
disclosed to consumers on credit cards and loans as a result of
"truth-in-lending laws." (Chapter 4)
annual percentage yield (APY) : The effective annual rate of interest that must be
disclosed to consumers by banks on their savings products as a result of
"truth-in-savings laws." (Chapter 4)
annualized net present value (ANPV)
approach: An approach to evaluating
unequal-lived projects that converts the net present value of unequal-lived,
mutually exclusive projects into an equivalent annual amount (in NPV terms).
(Chapter 10)
annuity: A stream of equal periodic cash flows, over a specified
time period. These cash flows can be inflows of returns earned on investments
or outflows of funds invested to earn future returns. (Chapter 4)
annuity due: An annuity for which the cash flow occurs at the beginning
of each period. (Chapter 4)
articles of partnership: The written contract used to formally establish a business
partnership. (Chapter 1)
assignment: A voluntary liquidation procedure by which a firm's
creditors pass the power to liquidate the firm's assets to an adjustment
bureau, a trade association, or a third party, which is designated the assignee.
(Chapter 17)
asymmetric information: The situation in which managers of a firm have more
information about operations and future prospects than do investors. (Chapter
12)
authorized shares: The number of shares of common stock that a firm's
corporate charter allows it to issue. (Chapter 7)
average age of inventory: Average number of days' sales in inventory. (Chapter 2)
average collection period: The average amount of time needed to collect accounts
receivable. (Chapter 2)
average payment period: The average amount of time needed to pay accounts payable.
(Chapter 2)
average tax rate: A firm's taxes divided by its taxable income. (Chapter 1)
balance sheet: Summary statement of the firm's financial position at a
given point in time. (Chapter 2)
bankruptcy: Business failure that occurs when the stated value of a
firm's liabilities exceeds the fair market value of its assets. (Chapter 17)
Bankruptcy Reform Act of 1978: The governing bankruptcy legislation in the United States
today. (Chapter 17)
bar chart: The simplest type of probability distribution; shows only a
limited number of outcomes and associated probabilities for a given event.
(Chapter 5)
basic EPS: Earnings per share (EPS) calculated without regard to any
contingent securities. (Chapter 16)
benchmarking: A type of cross-sectional analysis in which the
firm's ratio values are compared to those of a key competitor or group of
competitors that it wishes to emulate. (Chapter 2)
beta coefficient (b): A relative measure of nondiversifiable risk. An index
of the degree of movement of an asset's return in response to a change in the market
return. (Chapter 5)
bird-in-the-hand argument: The belief, in support of dividend relevance theory,
that investors see current dividends as less risky than future dividends or
capital gains. (Chapter 13)
board of directors: Group elected by the firm's stockholders and having
ultimate authority to guide corporate affairs and make general policy. (Chapter
1)
bond: Long-term debt instrument used by business and government
to raise large sums of money, generally from a diverse group of lenders.
(Chapter 1)
bond indenture: A legal document that specifies both the rights of the
bondholders and the duties of the issuing corporation. (Chapter 6)
book value: The strict accounting value of an asset, calculated by
subtracting its accumulated depreciation from its installed cost. (Chapter 8)
book value per share: The amount per share of common stock that would be received
if all of the firm's assets were sold for their exact book (accounting)
value and the proceeds remaining after paying all liabilities (including
preferred stock) were divided among the common stockholders. (Chapter 7)
book value weights: Weights that use accounting values to measure the
proportion of each type of capital in the firm's financial structure. (Chapter
11)
breakeven analysis: Indicates the level of operations necessary to cover all
operating costs and the profitability associated with various levels of sales.
(Chapter 12)
breakeven cash inflow: The minimum level of cash inflow necessary for a project to
be acceptable, that is, NPV > $0. (Chapter 10)
break point: The level of total new financing at which the cost
of one of the financing components rises, thereby causing an upward shift in
the weighted marginal cost of capital (WMCC). (Chapter 11)
breakup value: The value of a firm measured as the sum of the values of
its operating units if each were sold separately. (Chapter 17)
business risk: The risk to the firm of being unable to cover operating
costs. (Chapter 11)
call feature: A feature included in nearly all corporate bond issues that
gives the issuer the opportunity to repurchase bonds at a stated call price
prior to maturity. (Chapter 6)
call option: An option to purchase a specified number of shares
of a stock (typically 100) on or before a specified future date at a stated
price. (Chapter 16)
call premium: The amount by which a bond's call price exceeds its
par value. (Chapter 6)
call price: The stated price at which a bond may be repurchased, by use
of a call feature, prior to maturity. (Chapter 6)
capital: The long-term funds of a firm; all items on the right-hand
side of the firm's balance sheet, excluding current liabilities.
(Chapter 7)
capital asset pricing model (CAPM) : Describes the relationship between the required return, ks,
and the nondiversifiable risk of the firm as measured by the beta coefficient, b.
(Chapters 5 and 11)
capital budgeting: The process of evaluating and selecting long-term
investments that are consistent with the firm's goal of maximizing owner
wealth. (Chapter 8)
capital budgeting process: Five distinct but interrelated steps: proposal
generation, review and analysis, decision making, implementation, and follow-up.
(Chapter 8)
capital expenditure: An outlay of funds by the firm that is expected to produce
benefits over a period of time greater than 1 year. (Chapter 8)
capital gain: The amount by which the sale price of an asset exceeds the
asset's initial purchase price. (Chapter 1)
capital market: A market that enables suppliers and demanders of long-term
funds to make transactions. (Chapter 1)
capital rationing: The financial situation in which a firm has only a fixed
number of dollars available for capital expenditures, and numerous projects
compete for these dollars. (Chapter 8)
capital structure: The mix of long-term debt and equity maintained by the
firm. (Chapter 12)
capitalized lease: A financial (capital) lease that has the present
value of all its payments included as an asset and corresponding liability on
the firm's balance sheet, as required by Financial Accounting Standards Board
(FASB) Standard No. 13. (Chapter 16)
carrying costs: The variable costs per unit of holding an item in inventory
for a specific period of time. (Chapter 14)
cash basis: Recognizes revenues and expenses only with respect to
actual inflows and outflows of cash. (Chapter 1)
cash bonuses: Cash paid to management for achieving certain performance
goals. (Chapter 1)
cash budget (cash forecast) : A statement of the firm's planned inflows and outflows of
cash that is used to estimate its short-term cash requirements. (Chapter 3)
cash concentration: The process used by the firm to bring lockbox and other
deposits together into one bank, often called the concentration bank.
(Chapter 14)
cash conversion cycle (CCC) : The amount of time a firm's resources are tied up;
calculated by subtracting the average payment period from the operating
cycle. (Chapter 14)
cash disbursements: All outlays of cash by the firm during a given financial
period. (Chapter 3)
cash discount: A percentage deduction from the purchase price; available
to the credit customer who pays its account within a specified time. (Chapter
14)
cash discount period: The number of days after the beginning of the credit period
during which the cash discount is available. (Chapter 14)
cash receipts: All of a firm's inflows of cash in a given financial
period. (Chapter 3)
change in net working capital: The difference between a change in current assets and a
change in current liabilities. (Chapter 8)
Chapter 7: The portion of the Bankruptcy Reform Act of 1978
that details the procedures to be followed when liquidating a failed firm.
(Chapter 17)
Chapter 11: The portion of the Bankruptcy Reform Act of 1978
that outlines the procedures for reorganizing a failed (or failing) firm,
whether its petition is filed voluntarily or involuntarily. (Chapter 17)
clearing float: The time between deposit of a payment and when spendable
funds become available to the firm. (Chapter 14)
clientele effect: The argument that a firm attracts shareholders whose
preferences for the payment and stability of dividends correspond to the
payment pattern and stability of the firm itself. (Chapter 13)
closely owned (stock) : All common stock of a firm owned by a small group of
investors (such as a family). (Chapter 7)
coefficient of variation (CV) : A measure of relative dispersion that is useful in
comparing the risks of assets with differing expected returns. (Chapter 5)
collateral trust bonds: See Table 6.3 (Chapter 6)
commercial finance companies: Lending institutions that make only secured
loans--both short-term and long-term--to businesses. (Chapter 15)
commercial paper: A form of financing consisting of short-term, unsecured
promissory notes issued by firms with a high credit standing. (Chapter 15)
commitment fee: The fee that is normally charged on a revolving credit
agreement; it often applies to the average unused balance of the borrower's
credit line. (Chapter 15)
common stock: The purest and most basic form of corporate ownership.
(Chapter 1)
common-size income statement: An income statement in which each item is expressed as a
percentage of sales. (Chapter 2)
compensating balance: A required checking account balance equal to a certain
percentage of the amount borrowed from a bank under a line-of-credit or revolving
credit agreement. (Chapter 15)
composition: A pro rata cash settlement of creditor claims by the debtor
firm; a uniform percentage of each dollar owed is paid. (Chapter 17)
compound interest: Interest that is earned on a given deposit and has become
part of the principal at the end of a specified period. (Chapter 4)
conflicting rankings: Conflicts in the ranking given a project by NPV and IRR,
resulting from differences in the magnitude and timing of cash flows. (Chapter
9)
congeneric merger: A merger in which one firm acquires another firm that is in
the same general industry but neither in the same line of business nor a
supplier or customer. (Chapter 17)
conglomerate merger: A merger combining firms in unrelated businesses.
(Chapter 17)
conservative funding strategy: A funding strategy under which the firm funds both its
seasonal and its permanent requirements with long-term debt. (Chapter 14)
consolidation: The combination of two or more firms to form a completely
new corporation. (Chapter 17)
constant-growth model: A widely cited dividend valuation approach that assumes
that dividends will grow at a constant rate, but a rate that is less than the
required return. (Chapter 7)
constant-growth valuation (Gordon)
model: Assumes that the value of a share
of stock equals the present value of all future dividends (assumed to grow at a
constant rate) that it is expected to provide over an infinite time horizon.
(Chapter 11)
constant-payout-ratio dividend
policy: A dividend policy based on the
payment of a certain percentage of earnings to owners in each dividend period.
(Chapter 13)
contingent securities: Convertibles, warrants, and stock options. Their presence
affects the reporting of a firm's earnings per share (EPS). (Chapter 16)
continuous compounding: Compounding of interest an infinite number of times per
year at intervals of microseconds. (Chapter 4)
continuous probability distribution: A probability distribution showing all the possible
outcomes and associated probabilities for a given event. (Chapter 5)
controlled disbursing: The strategic use of mailing points and bank accounts to
lengthen mail float and clearing float, respectively. (Chapter 14)
controller: The firm's chief accountant, who is responsible for the
firm's accounting activities, such as corporate accounting, tax management,
financial accounting, and cost accounting. (Chapter 1)
conventional cash flow pattern: An initial outflow followed only by a series of inflows.
(Chapter 8)
conversion (or stock) value: The value of a convertible security measured in terms of
the market price of the common stock into which it can be converted. (Chapter
16)
conversion feature: An option that is included as part of a bond or a preferred
stock issue and allows its holder to change the security into a stated number
of shares of common stock. (Chapters 6 and 16)
conversion price: The per-share price that is effectively paid for common
stock as the result of conversion of a convertible security. (Chapter 16)
conversion ratio: The ratio at which a convertible security can be exchanged
for common stock. (Chapter 16)
convertible bond: A bond that can be changed into a specified number of
shares of common stock. (Chapter 16)
convertible preferred stock: Preferred stock that can be changed into a specified number
of shares of common stock. (Chapter 16)
corporate bond: A long-term debt instrument indicating that a corporation
has borrowed a certain amount of money and promises to repay it in the future
under clearly defined terms. (Chapter 6)
corporate restructuring: The activities involving expansion or contraction of a
firm's operations or changes in its asset or financial (ownership) structure.
(Chapter 17)
corporation: An artificial being created by law (often called a
"legal entity"). (Chapter 1)
correlation: A statistical measure of the relationship between any two
series of numbers representing data of any kind. (Chapter 5)
correlation coefficient: A measure of the degree of correlation between two series.
(Chapter 5)
cost of capital: The rate of return that a firm must earn on the projects in
which it invests to maintain its market value and attract funds. (Chapter 11)
cost of common stock equity, ks: The rate at which investors discount the expected dividends
of the firm to determine its share value. (Chapter 11)
cost of giving up a cash discount: The implied rate of interest paid to delay payment of an
account payable for an additional number of days. (Chapter 15)
cost of long-term debt, ki: The after-tax cost today of raising long-term funds through
borrowing. (Chapter 11)
cost of new asset: The net outflow necessary to acquire a new asset. (Chapter
8)
cost of a new issue of common stock,
kn: The cost of common stock, net of
underpricing and associated flotation costs. (Chapter 11)
cost of preferred stock, kp: The ratio of the preferred stock dividend to the firm's net
proceeds from the sale of preferred stock; calculated by dividing the annual dividend,
Dp, by the net proceeds from the sale of the preferred stock,
Np. (Chapter 11)
cost of retained earnings, kr: The same as the cost of an equivalent fully subscribed
issue of additional common stock, which is equal to the cost of common
stock equity, ks. (Chapter 11)
coupon interest rate: The percentage of a bond's par value that will be paid
annually, typically in two equal semiannual payments, as interest. (Chapter 6)
coverage ratios: Ratios that measure the firm's ability to pay certain fixed
charges. (Chapter 2)
credit monitoring: The ongoing review of a firm's accounts receivable to
determine whether customers are paying according to the stated credit terms.
(Chapter 14)
credit period: The number of days after the beginning of the credit period
until full payment of the account is due. (Chapter 14)
credit scoring: A credit selection method commonly used with
high-volume/small-dollar credit requests; relies on a credit score determined
by applying statistically derived weights to a credit applicant's scores on key
financial and credit characteristics. (Chapter 14)
credit standards: The firm's minimum requirements for extending credit to a
customer. (Chapter 14)
credit terms: The terms of sale for customers who have been extended
credit by the firm. (Chapter 14)
creditor control: An arrangement in which the creditor committee replaces the
firm's operating management and operates the firm until all claims have been
settled. (Chapter 17)
cross-sectional analysis: Comparison of different firms' financial ratios at the same
point in time; involves comparing the firm's ratios to those of other firms in
its industry or to industry averages. (Chapter 2)
cumulative preferred stock: Preferred stock for which all passed (unpaid) dividends in
arrears, along with the current dividend, must be paid before dividends can be
paid to common stockholders. (Chapter 7)
current assets: Short-term assets, expected to be converted into cash
within 1 year or less. (Chapter 2)
current liabilities: Short-term liabilities, expected to be paid within 1 year
or less. (Chapter 2)
current rate (translation) method: Technique used by U.S.-based companies to translate their
foreign-currency-denominated assets and liabilities into dollars, for
consolidation with the parent company's financial statements, using the
exchange rate prevailing at the fiscal year ending date (the current rate).
(Chapter 2)
current ratio: A measure of liquidity calculated by dividing the firm's
current assets by its current liabilities. (Chapter 2)
date of record (dividends) : Set by the firm's directors, the date on which all persons
whose names are recorded as stockholders receive a declared dividend at a
specified future time. (Chapter 13)
debentures: See Table 6.3 (Chapter 6)
debt capital: All long-term borrowing incurred by a firm, including
bonds. (Chapter 7)
debt ratio: Measures the proportion of total assets financed by the
firm's creditors. (Chapter 2)
debtor in possession (DIP) : The term for a firm that files a reorganization petition
under Chapter 11 and then develops, if feasible, a reorganization plan.
(Chapter 17)
degree of financial leverage (DFL) : The numerical measure of the firm's financial leverage.
(Chapter 12)
degree of indebtedness: Measures the amount of debt relative to other significant
balance sheet amounts. (Chapter 2)
degree of operating leverage (DOL) : The numerical measure of the firm's operating leverage.
(Chapter 12)
degree of total leverage (DTL) : The numerical measure of the firm's total leverage.
(Chapter 12)
depository transfer check (DTC) : An unsigned check drawn on one of a firm's bank accounts
and deposited in another. (Chapter 14)
depreciable life: Time period over which an asset is depreciated. (Chapter 3)
depreciation: The systematic charging of a portion of the costs of fixed
assets against annual revenues over time. (Chapter 3)
derivative security: A security that is neither debt nor equity but derives its
value from an underlying asset that is often another security; called
"derivatives," for short. (Chapter 16)
diluted EPS: Earnings per share (EPS) calculated under the assumption
that all contingent securities that would have dilutive effects are
converted and exercised and are therefore common stock. (Chapter 16)
dilution of ownership: Occurs when a new stock issue results in each present
shareholder having a claim on a smaller part of the firm's earnings than
previously. (Chapter 7)
direct lease: A lease under which a lessor owns or acquires the assets
that are leased to a given lessee. (Chapter 16)
discount: The amount by which a bond sells at a value that is less
than its par value. (Chapter 6)
discount loans: Loans on which interest is paid in advance by being
deducted from the amount borrowed. (Chapter 15)
discounting cash flows: The process of finding present values; the inverse of
compounding interest. (Chapter 4)
diversifiable risk: The portion of an asset's risk that is attributable to
firm-specific, random causes; can be eliminated through diversification. Also
called unsystematic risk. (Chapter 5)
divestiture: The selling of some of a firm's assets for various
strategic reasons. (Chapter 17)
dividend irrelevance theory: Miller and Modigliani's theory that in a perfect world, the
firm's value is determined solely by the earning power and risk of its assets
(investments) and that the manner in which it splits its earnings stream between
dividends and internally retained (and reinvested) funds does not affect this
value. (Chapter 13)
dividend payout ratio: Indicates the percentage of each dollar earned that is
distributed to the owners in the form of cash. It is calculated by dividing the
firm's cash dividend per share by its earnings per share. (Chapter 13)
dividend per share (DPS) : The dollar amount of cash distributed during the period on
behalf of each outstanding share of common stock. (Chapter 2)
dividend policy: The firm's plan of action to be followed whenever a
dividend decision is made. (Chapter 13)
dividend reinvestment plans (DRIPs)
: Plans that enable stockholders to
use dividends received on the firm's stock to acquire additional shares--even
fractional shares--at little or no transaction cost. (Chapter 13)
dividend relevance theory: The theory, advanced by Gordon and Lintner, that there is a
direct relationship between a firm's dividend policy and its market value.
(Chapter 13)
dividends: Periodic distributions of earnings to the stockholders of a
firm. (Chapter 1)
double taxation: Occurs when the already once-taxed earnings of a
corporation are distributed as cash dividends to stockholders, who must pay
taxes on them. (Chapter 1)
DuPont formula: Multiplies the firm's net profit margin by its total
asset turnover to calculate the firm's return on total assets (ROA).
(Chapter 2)
DuPont system of analysis: System used to dissect the firm's financial statements and
to assess its financial condition. (Chapter 2)
earnings per share (EPS) : The amount earned during the period on behalf of each
outstanding share of common stock, calculated by dividing the period's total
earnings available for the firm's common stockholders by the number of shares
of common stock outstanding. (Chapter 1)
EBIT-EPS approach: An approach for selecting the capital structure that
maximizes earnings per share (EPS) over the expected range of earnings before
interest and taxes (EBIT). (Chapter 12)
economic exposure: The risk resulting from the effects of changes in foreign
exchange rates on the firm's value. (Chapter 18)
economic order quantity (EOQ) model: Inventory management technique for determining an item's
optimal order size, which is the size that minimizes the total of its order
costs and carrying costs. (Chapter 14)
economic value added (EVA®): A popular measure used by many firms to determine whether
an investment contributes positively to the owners' wealth; calculated by
subtracting the cost of funds used to finance an investment from its after-tax
operating profits. (Chapter 1)
effective (true) annual rate (EAR) : The annual rate of interest actually paid or earned.
(Chapter 4)
effective interest rate: In the international context, the rate equal to the nominal
rate plus (or minus) any forecast appreciation (or depreciation) of a foreign
currency relative to the currency of the MNC parent. (Chapter 18)
efficient market: A market that allocates funds to their most productive uses
as a result of competition among wealth-maximizing investors that determines
and publicizes prices that are believed to be close to their true value; a
market with the following characteristics: many small investors, all having the
same information and expectations with respect to securities; no restrictions
on investment, no taxes, and no transaction costs; and rational investors, who
view securities similarly and are risk-averse, preferring higher returns and
lower risk. (Chapters 1 and 5)
efficient-market hypothesis: Theory describing the behavior of an assumed
"perfect" market in which (1) securities are typically in
equilibrium, (2) security prices fully reflect all public information available
and react swiftly to new information, and, (3) because stocks are fairly
priced, investors need not waste time looking for mispriced securities.
(Chapter 7)
efficient portfolio: A portfolio that maximizes return for a given level of risk
or minimizes risk for a given level of return. (Chapter 5)
ending cash: The sum of the firm's beginning cash and its net cash flow
for the period. (Chapter 3)
equipment trust certificates: See Table 6.3 (Chapter 6)
equity capital: The long-term funds provided by the firm's owners, the
stockholders. (Chapter 7)
ethics: Standards of conduct or moral judgment. (Chapter 1)
euro: A single currency adopted on January 1, 1999 by 12 of the
15 EU nations, who switched to a single set of euro bills and coins on January
1, 2002. (Chapter 18)
Eurobond: An international bond that is sold primarily in
countries other than the country of the currency in which the issue is
denominated. (Chapters 6 and 18)
Eurobond market: The market in which corporations and governments typically
issue bonds denominated in dollars and sell them to investors located outside
the United States. (Chapter 1)
Eurocurrency market: International equivalent of the domestic money market.
(Chapter 1)
Eurocurrency markets: The portion of the Euromarket that provides short-term,
foreign-currency financing to subsidiaries of MNCs. (Chapter 18)
Euroequity market: The capital market around the world that deals in
international equity issues; London has become the center of Euroequity
activity. (Chapter 18)
Euromarket: The international financial market that provides for
borrowing and lending currencies outside their country of origin. (Chapter 18)
European Open Market: The transformation of the European Union into a single
market at year-end 1992. (Chapter 18)
European Union (EU) : A significant economic force currently made up of 15
nations that permit free trade within the union. (Chapter 18)
ex dividend: Period, beginning 2 business days prior to the date
of record, during which a stock is sold without the right to receive the
current dividend. (Chapter 13)
excess cash balance: The (excess) amount available for investment by the firm if
the period's ending cash is greater than the desired minimum cash balance;
assumed to be invested in marketable securities. (Chapter 3)
excess earnings accumulation tax: The tax the IRS levies on retained earnings above $250,000
when it determines that the firm has accumulated an excess of earnings to allow
owners to delay paying ordinary income taxes on dividends received. (Chapter
13)
exchange rate risk: The danger that an unexpected change in the exchange rate
between the dollar and the currency in which a project's cash flows are
denominated will reduce the market value of that project's cash flow; the risk
caused by varying exchange rates between two currencies. (Chapters 10 and 18)
exercise (or option) price: The price at which holders of warrants can purchase a
specified number of shares of common stock. (Chapter 16)
expectations theory: The theory that the yield curve reflects investor expectations
about future interest rates; an increasing inflation expectation results in an
upward-sloping yield curve, and a decreasing inflation expectation results in a
downward-sloping yield curve (Chapter 6)
expected return, ˆ [[kbar]]: The return that is expected to be earned on a given asset
each period over an infinite time horizon. (Chapter 7)
expected value of a return (kw)
: The most likely return on a given
asset. (Chapter 5)
extendible notes: See Table 6.4 (Chapter 6)
extension: An arrangement whereby the firm's creditors receive payment
in full, although not immediately. (Chapter 17)
external financing required
("plug" figure) : Under the
judgmental approach for developing a pro forma balance sheet, the amount of
external financing needed to bring the statement into balance. (Chapter 3)
external forecast: A sales forecast based on the relationships observed
between the firm's sales and certain key external economic indicators. (Chapter
3)
extra dividend: An additional dividend optionally paid by the firm if
earnings are higher than normal in a given period. (Chapter 13)
factor: A financial institution that specializes in purchasing
accounts receivable from businesses. (Chapter 15)
factoring accounts receivable: The outright sale of accounts receivable at a discount to a
factor or other financial institution. (Chapter 15)
FASB No. 52: Statement issued by the FASB requiring U.S. multinationals
first to convert the financial statement accounts of foreign subsidiaries into
the functional currency and then to translate the accounts into the
parent firm's currency using the all-current-rate method. (Chapter 18)
federal funds: Loan transactions between commercial banks in which the
Federal Reserve banks become involved. (Chapter 1)
finance: The art and science of managing money. (Chapter 1)
financial (or capital) lease: A longer-term lease than an operating lease that is noncancelable
and obligates the lessee to make payments for the use of an asset over a
predefined period of time; the total payments over the term of the lease are greater
than the lessor's initial cost of the leased asset. (Chapter 16)
Financial Accounting Standards Board
(FASB) Standard No. 52: Mandates
that U.S.-based companies translate their foreign-currency-denominated assets
and liabilities into dollars, for consolidation with the parent company's
financial statements. (Chapter 2)
Financial Accounting Standards Board
(FASB) : The accounting profession's
rule-setting body, which authorizes generally accepted accounting principles
(GAAP). (Chapter 2)
financial breakeven point: The level of EBIT necessary to just cover all fixed
financial costs; the level of EBIT for which EPS = $0. (Chapter 12)
financial institution: An intermediary that channels the savings of individuals,
businesses, and governments into loans or investments. (Chapter 1)
financial leverage multiplier (FLM)
: The ratio of the firm's total
assets to its common stock equity. (Chapter 2)
financial leverage: The potential use of fixed financial costs to
magnify the effects of changes in earnings before interest and taxes on the
firm's earnings per share. (Chapters 2 and 12)
financial manager: Actively manages the financial affairs of any type of
business, whether financial or nonfinancial, private or public, large or small,
profit-seeking or not-for-profit. (Chapter 1)
financial markets: Forums in which suppliers of funds and demanders of funds
can transact business directly. (Chapter 1)
financial merger: A merger transaction undertaken with the goal of
restructuring the acquired company to improve its cash flow and unlock its
hidden value. (Chapter 17)
financial planning process: Planning that begins with long-term, or strategic,
financial plans that in turn guide the formulation of short-term, or operating,
plans and budgets. (Chapter 3)
financial risk: The risk to the firm of being unable to cover required
financial obligations (interest, lease payments, preferred stock dividends).
(Chapter 11)
financial services: The part of finance concerned with the design and delivery
of advice and financial products to individuals, business, and government.
(Chapter 1)
financing flows: Cash flows that result from debt and equity financing
transactions; includes incurrence and repayment of debt, cash inflow from the
sale of stock, and cash outflows to pay cash dividends or repurchase stock.
(Chapter 3)
five C's of credit: The five key dimensions--character, capacity, capital,
collateral, and conditions--used by credit analysts to provide a framework for
in-depth credit analysis. (Chapter 14)
fixed (or semifixed) relationship: The constant (or relatively constant) relationship of a
currency to one of the major currencies, a combination (basket) of major
currencies, or some type of international foreign exchange standard. (Chapter
18)
fixed-payment coverage ratio: Measures the firm's ability to meet all fixed-payment
obligations. (Chapter 2)
fixed-rate loan: A loan with a rate of interest that is determined at a set
increment above the prime rate and at which it remains fixed until maturity.
(Chapter 15)
flat yield curve: A yield curve that reflects relatively similar borrowing
costs for both short- and longer-term loans. (Chapter 6)
float: Funds that have been sent by the payer but are not yet
usable funds to the payee. (Chapter 14)
flotation costs: The total costs of issuing and selling a security. (Chapter
11)
floating inventory lien: A secured short-term loan against inventory under which the
lender's claim is on the borrower's inventory in general. (Chapter 15)
floating relationship: The fluctuating relationship of the values of two
currencies with respect to each other. (Chapter 18)
floating-rate bonds: See Table 6.4 (Chapter 6)
floating-rate loan: A loan with a rate of interest initially set at an
increment above the prime rate and allowed to "float," or vary, above
prime as the prime rate varies until maturity. (Chapter 15)
foreign bond: Bond that is issued by a foreign corporation or government
and is denominated in the investor's home currency and sold in the investor's
home market. (Chapters 1, 6, and 18)
foreign direct investment (FDI) : The transfer by a multinational firm of capital,
managerial, and technical assets from its home country to a host country.
(Chapter 18)
foreign direct investment: The transfer of capital, managerial, and technical assets
to a foreign country. (Chapter 8)
foreign exchange manager: The manager responsible for monitoring and managing the
firm's exposure to loss from currency fluctuations. (Chapter 1)
foreign exchange rate: The value of two currencies with respect to each other.
(Chapter 18)
forward exchange rate: The rate of exchange between two currencies at some
specified future date. (Chapter 18)
free cash flow (FCF) : The amount of cash flow available to investors (creditors
and owners) after the firm has met all operating needs and paid for investments
in net fixed assets and net current assets. (Chapter 3)
free cash flow valuation model: A model that determines the value of an entire company as
the present value of its expected free cash flows discounted at the firm's weighted
average cost of capital, which is its expected average future cost of funds
over the long run. (Chapter 7)
friendly merger: A merger transaction endorsed by the target firm's
management, approved by its stockholders, and easily consummated. (Chapter 17)
functional currency: The currency of the host country in which a subsidiary
primarily generates and expends cash and in which its accounts are maintained.
(Chapter 18)
future value: The value of a present amount at a future date, found by
applying compound interest over a specified period of time. (Chapter 4)
future value interest factor: The multiplier used to calculate, at a specified interest
rate, the future value of a present amount as of a given time. (Chapter 4)
future value interest factor for an
ordinary annuity: The multiplier used to calculate
the future value of an ordinary annuity at a specified interest rate
over a given period of time. (Chapter 4)
General Agreement on Tariffs and
Trade (GATT) : A treaty that has governed world
trade throughout most of the postwar era; it extends free-trading rules to
broad areas of economic activity and is policed by the World Trade
Organization (WTO). (Chapter 18)
generally accepted accounting
principles (GAAP) : The practice and procedure
guidelines used to prepare and maintain financial records and reports;
authorized by the Financial Accounting Standards Board (FASB). (Chapter
2)
golden parachutes: Provisions in the employment contracts of key executives
that provide them with sizable compensation if the firm is taken over; deters
hostile takeovers to the extent that the cash outflows required are large
enough to make the takeover unattractive. (Chapter 17)
Gordon model: A common name for the constant-growth model that is
widely cited in dividend valuation. (Chapter 7)
greenmail: A takeover defense under which a target firm repurchases,
through private negotiation, a large block of stock at a premium from one or
more shareholders to end a hostile takeover attempt by those shareholders.
(Chapter 17)
gross profit margin: Measures the percentage of each sales dollar remaining
after the firm has paid for its goods. (Chapter 2)
hedging: Offsetting or protecting against the risk of adverse price
movements. (Chapter 16)
hedging strategies: Techniques used to offset or protect against risk; in the
international context, these include borrowing or lending in different
currencies; undertaking contracts in the forward, futures, and/or options
markets; and swapping assets/liabilities with other parties. (Chapter 18)
historical weights: Either book or market value weights based on actual
capital structure proportions. (Chapter 11)
holding company: A corporation that has voting control of one or more other
corporations. (Chapter 17)
horizontal merger: A merger of two firms in the same line of business.
(Chapter 17)
hostile merger: A merger transaction that the target firm's management does
not support, forcing the acquiring company to try to gain control of the firm
by buying shares in the marketplace. (Chapter 17)
hybrid security: A form of debt or equity financing that possesses
characteristics of both debt and equity financing. (Chapter 16)
implied price of a warrant: The price effectively paid for each warrant attached to a
bond. (Chapter 16)
incentive plans: Management compensation plans that tend to tie management
compensation to share price; most popular incentive plan involves the grant of stock
options. (Chapter 1)
income bonds: See Table 6.3 (Chapter 6)
income statement: Provides a financial summary of the firm's operating
results during a specified period. (Chapter 2)
incremental cash flows: The additional cash flows--outflows or
inflows--expected to result from a proposed capital expenditure. (Chapter 8)
independent projects: Projects whose cash flows are unrelated or independent of
one another; the acceptance of one does not eliminate the others from
further consideration. (Chapter 8)
informational content: The information provided by the dividends of a firm with
respect to future earnings, which causes owners to bid up or down the price of
the firm's stock. (Chapter 13)
initial investment: The relevant cash outflow for a proposed project at time
zero. (Chapter 8)
initial public offering (IPO): The first public sale of a firm's stock. (Chapter 7)
installation costs: Any added costs that are necessary to place an asset into
operation. (Chapter 8)
installed cost of new asset: The cost of the asset plus its installation costs; equals
the asset's depreciable value. (Chapter 8)
intercorporate dividends: Dividends received by one corporation on common and
preferred stock held in other corporations. (Chapter 1)
interest rate risk: The chance that interest rates will change and thereby
change the required return and bond value. Rising rates, which result in
decreasing bond values, are of greatest concern. (Chapter 6)
interest rate: The compensation paid by the borrower of funds to the
lender; from the borrower's point of view, the cost of borrowing funds.
(Chapter 6)
intermediate cash inflows: Cash inflows received prior to the termination of a
project. (Chapter 9)
internal forecast: A sales forecast based on a buildup, or consensus, of sales
forecasts through the firm's own sales channels. (Chapter 3)
internal rate of return (IRR): A sophisticated capital budgeting technique; the discount
rate that equates the NPV of an investment opportunity with $0 (because the
present value of cash inflows equals the initial investment); it is the
compound annual rate of return that the firm will earn if it invests in the
project and receives the given cash inflows. (Chapter 9)
internal rate of return approach: An approach to capital rationing that involves graphing
project IRRs in descending order against the total dollar investment to
determine the group of acceptable projects. (Chapter 10)
international bond: A bond that is initially sold outside the country of the
borrower and is often distributed in several countries. (Chapter 18)
international equity market: A market that allows corporations to sell blocks of shares
to investors in a number of different countries simultaneously. (Chapter 1)
inventory turnover: Measures the activity, or liquidity, of a firm's inventory.
(Chapter 2)
inverted yield curve: A downward-sloping yield curve that indicates
generally cheaper long-term borrowing costs than short-term borrowing costs.
(Chapter 6)
investment bankers: Financial intermediaries who, in addition to their role in
selling new security issues, can be hired by acquirers in mergers to find
suitable target companies and assist in negotiations. (Chapters 7 and 17)
investment flows: Cash flows associated with purchase and sale of both fixed
assets and business interests. (Chapter 3)
investment opportunities schedule
(IOS): A ranking of investment
possibilities from best (highest return) to worst (lowest return); the graph
that plots project IRRs in descending order against total dollar investment.
(Chapters 10 and 11)
involuntary reorganization: A petition initiated by an outside party, usually a
creditor, for the reorganization and payment of creditors of a failed firm.
(Chapter 17)
issued shares: The number of shares of common stock that have been put
into circulation; the sum of outstanding shares and treasury stock. (Chapter 7)
joint venture: A partnership under which the participants have
contractually agreed to contribute specified amounts of money and expertise in
exchange for stated proportions of ownership and profit. (Chapter 18)
judgmental approach: A simplified approach for preparing the pro forma balance
sheet under which the values of certain balance sheet accounts are estimated
and the firm's external financing is used as a balancing, or "plug,"
figure. (Chapter 3)
junk bonds: See Table 6.4 (Chapter 6)
just-in-time (JIT) system: Inventory management technique that minimizes inventory
investment by having materials arrive at exactly the time they are needed for
production. (Chapter 14)
lease-versus-purchase
(lease-versus-buy) decision:
The decision facing firms needing to acquire new fixed assets: whether to lease
the assets or to purchase them, using borrowed funds or available liquid
resources. (Chapter 16)
leasing: The process by which a firm can obtain the use of certain
fixed assets for which it must make a series of contractual, periodic,
tax-deductible payments. (Chapter 16)
lessee: The receiver of the services of the assets under a lease
contract. (Chapter 16)
lessor: The owner of assets that are being leased. (Chapter 16)
letter of credit: A letter written by a company's bank to the company's
foreign supplier, stating that the bank guarantees payment of an invoiced
amount if all the underlying agreements are met. (Chapter 15)
letter to stockholders: Typically, the first element of the annual stockholders'
report and the primary communication from management. (Chapter 2)
leverage: Results from the use of fixed-cost assets or funds to
magnify returns to the firm's owners. (Chapter 12)
leveraged buyout (LBO): An acquisition technique involving the use of a large amount
of debt to purchase a firm; an example of a financial merger. (Chapter
17)
leveraged lease: A lease under which the lessor acts as an equity
participant, supplying only about 20 percent of the cost of the asset, while a
lender supplies the balance. (Chapter 16)
leveraged recapitalization: A takeover defense in which the target firm pays a large
debt-financed cash dividend, increasing the firm's financial leverage and
thereby deterring the takeover attempt. (Chapter 17)
lien: A publicly disclosed legal claim on collateral. (Chapter
15)
limited liability corporation (LLC): See Table 1.2. (Chapter 1)
limited liability partnership (LLP): See Table 1.2. (Chapter 1)
limited partnership (LP): See Table 1.2. (Chapter 1)
line of credit: An agreement between a commercial bank and a business
specifying the amount of unsecured short-term borrowing the bank will make
available to the firm over a given period of time. (Chapter 15)
liquidation value per share: The actual amount per share of common stock that
would be received if all of the firm's assets were sold for their market
value, liabilities (including preferred stock) were paid, and any remaining
money were divided among the common stockholders. (Chapter 7)
liquidity: A firm's ability to satisfy its short-term obligations as
they come due. (Chapter 2)
liquidity preferences: General preferences of investors for shorter-term
securities. (Chapter 6)
liquidity preference theory: Theory suggesting that for any given issuer, long-term interest
rates tend to be higher than short-term rates because (1) lower liquidity and
higher responsiveness to general interest rate movements of longer-term
securities exists and (2) borrower willingness to pay a higher rate for
long-term financing; causes the yield curve to be upward-sloping. (Chapter 6)
loan amortization: The determination of the equal periodic loan payments
necessary to provide a lender with a specified interest return and to repay the
loan principal over a specified period. (Chapter 4)
loan amortization schedule: A schedule of equal payments to repay a loan. It shows the
allocation of each loan payment to interest and principal. (Chapter 4)
lockbox system: A collection procedure in which customers mail payments to
a post office box that is emptied regularly by the firm's bank, who processes
the payments and deposits them in the firm's account. This system speeds up
collection time by reducing processing time as well as mail and clearing time.
(Chapter 14)
London Interbank Offered Rate (LIBOR): The base rate that is used to price all Eurocurrency loans.
(Chapter 1)
long-term debt: Debts for which payment is not due in the current year.
(Chapter 2)
long-term (strategic) financial
plans: Lay out a company's planned
financial actions and the anticipated impact of those actions over periods
ranging from 2 to 10 years. (Chapter 3)
low-regular-and-extra dividend
policy: A dividend policy based on paying a
low regular dividend, supplemented by an additional dividend when earnings are
higher than normal in a given period. (Chapter 13)
macro political risk: The subjection of all foreign firms to political
risk (takeover) by a host country because of political change, revolution, or
the adoption of new policies. (Chapter 18)
mail float: The time delay between when payment is placed in the mail
and when it is received. (Chapter 14)
maintenance clauses: Provisions normally included in an operating lease that
require the lessor to maintain the assets and to make insurance and tax
payments. (Chapter 16)
managerial finance: Concerns the duties of the financial manager in the
business firm. (Chapter 1)
marginal analysis: Economic principle that states that financial decisions
should be made and actions taken only when the added benefits exceed the added
costs. (Chapter 1)
marginal tax rate: The rate at which additional income is taxed.
(Chapter 1)
market/book (M/B) ratio: Provides an assessment of how investors view the firm's
performance. Firms expected to earn high returns relative to their risk
typically sell at higher M/B multiples. (Chapter 2)
market premium: The amount by which the market value exceeds the straight
or conversion value of a convertible security. (Chapter 16)
market ratios: Relate a firm's market value, as measured by its current
share price, to certain accounting values. (Chapter 2)
market return: The return on the market portfolio of all traded
securities. (Chapter 5)
market segmentation theory: Theory suggesting that the market for loans is segmented on
the basis of maturity and that the supply of and demand for loans within each
segment determine its prevailing interest rate; the slope of the yield curve is
determined by the general relationship between the prevailing rates in each
segment. (Chapter 6)
market value weights: Weights that use market values to measure the proportion of
each type of capital in the firm's financial structure. (Chapter 11)
marketable securities: Short-term debt instruments, such as U.S. Treasury bills,
commercial paper, and negotiable certificates of deposit issued by government,
business, and financial institutions, respectively. (Chapter 1)
materials requirement planning (MRP)
system: Inventory management technique that
applies EOQ concepts and a computer to compare production needs to available
inventory balances and determine when orders should be placed for various items
on a product's bill of materials. (Chapter 14)
Mercosur Group: A major South American trading bloc that includes countries
that account for more than half of total Latin American GDP. (Chapter 18)
merger: The combination of two or more firms, in which the
resulting firm maintains the identity of one of the firms, usually the larger.
(Chapter 17)
micro political risk: The subjection of an individual firm, a specific industry,
or companies from a particular foreign country to political risk
(takeover) by a host country. (Chapter 18)
mixed stream: A stream of unequal periodic cash flows that reflect no
particular pattern. (Chapter 4)
modified accelerated cost recovery
system (MACRS): System used to determine the
depreciation of assets for tax purposes. (Chapter 3)
modified DuPont formula: Relates the firm's return on total assets (ROA) to
its return on common equity (ROE) using the financial leverage
multiplier (FLM). (Chapter 2)
monetary union: The official melding of the national currencies of the EU
nations into one currency, the euro, on January 1, 2002. (Chapter 18)
money market: A financial relationship created between suppliers and
demanders of short-term funds. (Chapter 1)
mortgage bonds: See Table 6.3 (Chapter 6)
multinational companies (MNCs): Firms that have international assets and operations in
foreign markets and draw part of their total revenue and profits from such
markets. (Chapter 18)
mutually exclusive projects: Projects that compete with one another, so that the
acceptance of one eliminates from further consideration all other
projects that serve a similar function. (Chapter 8)
national entry control systems: Comprehensive rules, regulations, and incentives introduced
by host governments to regulate inflows of foreign direct investments
from MNCs and at the same time extract more benefits from their presence.
(Chapter 18)
negatively correlated: Describes two series that move in opposite directions.
(Chapter 5)
net cash flow: The mathematical difference between the firm's cash
receipts and its cash disbursements in each period. (Chapter 3)
net present value (NPV): A sophisticated capital budgeting technique; found by
subtracting a project's initial investment from the present value of its cash
inflows discounted at a rate equal to the firm's cost of capital. (Chapter 9)
net present value approach: An approach to capital rationing that is based on the use
of present values to determine the group of projects that will maximize owners'
wealth. (Chapter 10)
net present value profile: Graph that depicts a project's NPV for various discount
rates. (Chapter 9)
net proceeds: Funds actually received from the sale of a security.
(Chapter 11)
net profit margin: Measures the percentage of each sales dollar remaining
after all costs and expenses, including interest, taxes, and preferred
stock dividends, have been deducted. (Chapter 2)
net working capital: The amount by which a firm's current assets exceed its
current liabilities; can be positive or negative. (Chapters 8 and
14)
nominal (stated) annual rate: Contractual annual rate of interest charged by a lender or
promised by a borrower. (Chapter 4)
nominal interest rate: In the international context, the stated interest rate
charged on financing when only the MNC parent's currency is involved. (Chapter
18)
nominal rate of interest: The actual rate of interest charged by the supplier of
funds and paid by the demander. (Chapter 6)
noncash charge: An expense deducted on the income statement but does not
involve the actual outlay of cash during the period; includes depreciation,
amortization, and depletion. (Chapter 3)
nonconventional cash flow pattern: An initial outflow followed by a series of inflows and
outflows. (Chapter 8)
noncumulative preferred stock: Preferred stock for which passed (unpaid) dividends do not
accumulate. (Chapter 7)
nondiversifiable risk: The relevant portion of an asset's risk attributable to
market factors that affect all firms; cannot be eliminated through
diversification. Also called systematic risk. (Chapter 5)
nonnotification basis: The basis on which a borrower, having pledged an account
receivable, continues to collect the account payments without notifying the
account customer. (Chapter 15)
nonrecourse basis: The basis on which accounts receivable are sold to a factor
with the understanding that the factor accepts all credit risks on the
purchased accounts. (Chapter 15)
nonvoting common stock: Common stock that carries no voting rights; issued when the
firm wishes to raise capital through the sale of common stock but does not want
to give up its voting control. (Chapter 7)
no-par preferred stock: Preferred stock with no stated face value but with a stated
annual dollar dividend. (Chapter 7)
normal probability distribution: A symmetrical probability distribution whose shape
resembles a "bell-shaped" curve. (Chapter 5)
normal yield curve: An upward-sloping yield curve that indicates
generally cheaper short-term borrowing costs than long-term borrowing costs.
(Chapter 6)
North American Free Trade Agreement
(NAFTA): The treaty establishing free trade
and open markets between Canada, Mexico, and the United States. (Chapter 18)
notes to the financial statements: Footnotes detailing information on the accounting policies,
procedures, calculations, and transactions underlying entries in the financial
statements. (Chapter 2)
notification basis: The basis on which an account customer whose account has
been pledged (or factored) is notified to remit payment directly to the lender
(or factor). (Chapter 15)
offshore centers: Certain cities or states (including London, Singapore,
Bahrain, Nassau, Hong Kong, and Luxembourg) that have achieved prominence as
major centers for Euromarket business. (Chapter 18)
operating breakeven point: The level of sales necessary to cover all operating
costs; the point at which EBIT = 0. (Chapter 12)
operating cash flow (OCF): The cash flow a firm generates from its normal operations;
calculated as EBIT - taxes + depreciation. (Chapter 3)
operating cash inflows: The incremental after-tax cash inflows resulting from
implementation of a project during its life. (Chapter 8)
operating cycle (OC): The time from the beginning of the production process to
the collection of cash from the sale of the finished product. (Chapter 14)
operating expenditure: An outlay of funds by the firm resulting in benefits
received within 1 year. (Chapter 8)
operating flows: Cash flows directly related to sale and production of the
firm's products and services. (Chapter 3)
operating lease: A cancelable contractual arrangement whereby the
lessee agrees to make periodic payments to the lessor, often for 5 or fewer
years, to obtain an asset's services; generally, the total payments over the
term of the lease are less than the lessor's initial cost of the leased
asset. (Chapter 16)
operating leverage: The potential use of fixed operating costs to
magnify the effects of changes in sales on the firm's earnings before interest
and taxes. (Chapter 12)
operating profit margin: Measures the percentage of each sales dollar remaining
after all costs and expenses other than interest, taxes, and preferred
stock dividends are deducted; the "pure profits" earned on each sales
dollar. (Chapter 2)
operating unit: A part of a business, such as a plant, division, product
line, or subsidiary, that contributes to the actual operations of the firm.
(Chapter 17)
operating-change restrictions: Contractual restrictions that a bank may impose on a firm's
financial condition or operations as part of a line-of-credit agreement.
(Chapter 15)
opportunity costs: Cash flows that could be realized from the best alternative
use of an owned asset. (Chapter 8)
optimal capital structure: The capital structure at which the weighted average cost of
capital is minimized, thereby maximizing the firm's value. (Chapter 12)
option: An instrument that provides its holder with an opportunity
to purchase or sell a specified asset at a stated price on or before a set expiration
date. (Chapter 16)
order costs: The fixed clerical costs of placing and receiving an
inventory order. (Chapter 14)
ordinary annuity: An annuity for which the cash flow occurs at the end
of each period. (Chapter 4)
ordinary income: Income earned through the sale of a firm's goods or services.
(Chapter 1)
organized securities exchanges: Tangible organizations that act as secondary markets
where outstanding securities are resold. (Chapter 1)
outstanding shares: The number of shares of common stock held by the public.
(Chapter 7)
overhanging issue: A convertible security that cannot be forced into
conversion by using the call feature. (Chapter 16)
over-the-counter (OTC) exchange: An intangible market for the purchase and sale of
securities not listed by the organized exchanges. (Chapter 1)
paid-in capital in excess of par: The amount of proceeds in excess of the par value received
from the original sale of common stock. (Chapter 2)
partnership: A business owned by two or more people and operated for
profit. (Chapter 1)
par value (stock): A relatively useless value for a stock established for
legal purposes in the firm's corporate charter. (Chapter 7)
par-value preferred stock: Preferred stock with a stated face value that is used with
the specified dividend percentage to determine the annual dollar dividend.
(Chapter 7)
payback period: The amount of time required for a firm to recover its
initial investment in a project, as calculated from cash inflows.
(Chapter 9)
payment date: Set by the firm's directors, the actual date on which the
firm mails the dividend payment to the holders of record. (Chapter 13)
pecking order: A hierarchy of financing that begins with retained
earnings, which is followed by debt financing and finally external equity
financing. (Chapter 12)
percentage advance: The percent of the book value of the collateral that
constitutes the principal of a secured loan. (Chapter 15)
percent-of-sales method: A simple method for developing the pro forma income
statement; it forecasts sales and then expresses the various income statement
items as percentages of projected sales. (Chapter 3)
perfectly negatively correlated: Describes two negatively correlated series that have
a correlation coefficient of -1. (Chapter 5)
perfectly positively correlated: Describes two positively correlated series that have
a correlation coefficient of +1. (Chapter 5)
performance plans: Plans that tie management compensation to measures such as
EPS, growth in EPS, and other ratios of return. Performance shares
and/or cash bonuses are used as compensation under these plans. (Chapter
1)
performance shares: Shares of stock given to management for meeting stated
performance goals. (Chapter 1)
permanent funding requirement: A constant investment in operating assets resulting from
constant sales over time. (Chapter 14)
perpetuity: An annuity with an infinite life, providing continual
annual cash flow. (Chapter 4)
pledge of accounts receivable: The use of a firm's accounts receivable as security, or
collateral, to obtain a short-term loan. (Chapter 15)
poison pill: A takeover defense in which a firm issues securities that
give their holders certain rights that become effective when a takeover is
attempted; these rights make the target firm less desirable to a hostile
acquirer. (Chapter 17)
political risk: Risk that arises from the possibility that a host
government will take actions harmful to foreign investors or that political
turmoil in a country will endanger investments there. (Chapters 5 and 18)
portfolio: A collection, or group, of assets. (Chapter 5)
positively correlated: Describes two series that move in the same direction.
(Chapter 5)
preemptive right: Allows common stockholders to maintain their proportionate
ownership in the corporation when new shares are issued. (Chapter 7)
preferred stock: A special form of ownership having a fixed periodic
dividend that must be paid prior to payment of any common stock dividends.
(Chapter 1)
premium: The amount by which a bond sells at a value that is greater
than its par value. (Chapter 6)
present value: The current dollar value of a future amount--the amount of
money that would have to be invested today at a given interest rate over a
specified period to equal the future amount. (Chapter 4)
present value interest factor for an
ordinary annuity: The multiplier used to calculate
the present value of an ordinary annuity at a specified discount rate
over a given period of time. (Chapter 4)
present value interest factor: The multiplier used to calculate, at a specified discount
rate, the present value of an amount to be received in a future period.
(Chapter 4)
present value interest factor for an
ordinary annuity: The multiplier used to calculate
the present value of an ordinary annuity at a specified discount rate
over a given period of time. (Chapter 11)
president or chief executive officer
(CEO): Corporate official responsible for
managing the firm's day-to-day operations and carrying out the policies
established by the board of directors. (Chapter 1)
price/earnings multiple approach: A popular technique used to estimate the firm's share
value; calculated by multiplying the firm's expected earnings per share (EPS)
by the average price/earnings (P/E) ratio for the industry. (Chapter 7)
price/earnings (P/E) ratio: Measures the amount that investors are willing to pay for
each dollar of a firm's earnings; the higher the P/E ratio, the greater is
investor confidence. (Chapter 2)
primary market: Financial market in which securities are initially issued;
the only market in which the issuer is directly involved in the transaction.
(Chapter 1)
prime rate of interest (prime rate): The lowest rate of interest charged by leading banks on
business loans to their most important business borrowers. (Chapter 15)
principal: The amount of money on which interest is paid. (Chapter 4)
private placement: The sale of a new security issue, typically bonds or
preferred stock, directly to an investor or group of investors. (Chapter 1)
privately owned (stock): All common stock of a firm owned by a single individual.
(Chapter 7)
pro forma statements: Projected, or forecast, income statements and balance
sheets. (Chapter 3)
probability: The chance that a given outcome will occur. (Chapter
5)
probability distribution: A model that relates probabilities to the associated
outcomes. (Chapter 5)
proceeds from sale of old asset: The cash inflows, net of any removal or cleanup
costs, resulting from the sale of an existing asset. (Chapter 8)
processing float: The time between receipt of a payment and its deposit into
the firm's account. (Chapter 14)
profitability: The relationship between revenues and costs generated by
using the firm's assets--both current and fixed--in productive activities.
(Chapter 14)
prospectus: A portion of a security registration statement that
describes the key aspects of the issue, the issuer, and its management and
financial position. (Chapter 7)
proxy battle: The attempt by a nonmanagement group to gain control of the
management of a firm by soliciting a sufficient number of proxy votes. (Chapter
7)
proxy statement: A statement giving the votes of a stockholder to another
party. (Chapter 7)
public offering: The nonexclusive sale of either bonds or stocks to the
general public. (Chapter 1)
publicly owned (stock): Common stock of a firm owned by a broad group of unrelated
individual or institutional investors. (Chapter 7)
purchase options: Provisions frequently included in both operating and
financial leases that allow the lessee to purchase the leased asset at
maturity, typically for a prespecified price. (Chapter 16)
put option: An option to sell a specified number of shares of a
stock (typically 100) on or before a specified future date at a stated price.
(Chapter 16)
putable bonds: See Table 6.4 (Chapter 6)
pyramiding: An arrangement among holding companies wherein one holding
company controls other holding companies, thereby causing an even greater
magnification of earnings and losses. (Chapter 17)
quarterly compounding: Compounding of interest over four periods within the year.
(Chapter 4)
quick (acid-test) ratio: A measure of liquidity calculated by dividing the firm's
current assets minus inventory by its current liabilities. (Chapter 2)
quotations: Information on bonds, stocks, and other securities,
including current price data and statistics on recent price behavior. (Chapter
6)
range: A measure of an asset's risk, which is found by subtracting
the pessimistic (worst) outcome from the optimistic (best) outcome. (Chapter 5)
ranking approach: The ranking of capital expenditure projects on the basis of
some predetermined measure, such as the rate of return. (Chapter 8)
ratio analysis: Involves methods of calculating and interpreting financial
ratios to analyze and monitor the firm's performance. (Chapter 2)
ratio of exchange: The ratio of the amount paid per share of the target
company to the market price per share of the acquiring firm. (Chapter 17)
ratio of exchange in market price: Indicates the market price per share of the acquiring firm paid
for each dollar of market price per share of the target firm. (Chapter 17)
real options: Opportunities that are embedded in capital projects that
enable managers to alter their cash flows and risk in a way that affects
project acceptability (NPV). Also called strategic options. (Chapter 10)
real rate of interest: The rate that creates an equilibrium between the supply of
savings and the demand for investment funds in a perfect world, without
inflation, where funds suppliers and demanders are indifferent to the term of
loans or investments and have no liquidity preference, and where all outcomes
are certain. (Chapter 6)
recapitalization: The reorganization procedure under which a failed firm's
debts are generally exchanged for equity or the maturities of existing debts
are extended. (Chapter 17)
recaptured depreciation: The portion of an asset's sale price that is above its book
value and below its initial purchase price. (Chapter 8)
recovery period: The appropriate depreciable life of a particular asset as
determined by MACRS. (Chapter 3)
red herring: A preliminary prospectus made available to prospective
investors during the waiting period between the registration statement's filing
with the SEC and its approval. (Chapter 7)
regular dividend policy: A dividend policy based on the payment of a fixed-dollar
dividend in each period. (Chapter 13)
relevant cash flows: The incremental cash outflow (investment) and resulting
subsequent inflows associated with a proposed capital expenditure. (Chapter
8)
renewal options: Provisions especially common in operating leases that grant
the lessee the right to re-lease assets at the expiration of the lease.
(Chapter 16)
reorder point: The point at which to reorder inventory, expressed as days
of lead time x daily usage. (Chapter 14)
required return: The cost of funds obtained by selling an ownership
interest; it reflects the funds supplier's level of expected return. (Chapter
6)
required total financing: Amount of funds needed by the firm if the ending cash for
the period is less than the desired minimum cash balance; typically represented
by notes payable. (Chapter 3)
residual theory of dividends: A school of thought that suggests that the dividend paid by
a firm should be viewed as a residual--the amount left over after all
acceptable investment opportunities have been undertaken. (Chapter 13)
restrictive covenants: Provisions in a bond indenture that place operating
and financial constraints on the borrower. (Chapter 6)
retained earnings: The cumulative total of all earnings, net of dividends, that
have been retained and reinvested in the firm since its inception; earnings not
distributed to owners as dividends--a form of internal financing.
(Chapters 2 and 13)
return: The total gain or loss experienced on an investment over a
given period of time; calculated by dividing the asset's cash distributions
during the period, plus change in value, by its beginning-of-period investment
value. (Chapter 5)
return on common equity (ROE): Measures the return earned on the common stockholders'
investment in the firm. (Chapter 2)
return on total assets (ROA): Measures the overall effectiveness of management in
generating profits with its available assets; also called the return on
investment (ROI). (Chapter 2)
reverse stock split: A method used to raise the market price of a firm's stock
by exchanging a certain number of outstanding shares for one new share.
(Chapter 13)
revolving credit agreement: A line of credit guaranteed to a borrower by a
commercial bank regardless of the scarcity of money. (Chapter 15)
rights: Financial instruments that permit stockholders to purchase
additional shares at a price below the market price, in direct proportion to
their number of owned shares. (Chapter 7)
risk: The chance of financial loss or, more formally, the variability
of returns associated with a given asset. (Chapters 1 and 5)
risk (in capital budgeting): The chance that a project will prove unacceptable or, more
formally, the degree of variability of cash flows. (Chapter 10)
risk (of technical insolvency): The probability that a firm will be unable to pay its bills
as they come due. (Chapter 14)
risk-adjusted discount rate (RADR): The rate of return that must be earned on a given project
to compensate the firm's owners adequately--that is, to maintain or improve the
firm's share price. (Chapter 10)
risk-averse: The attitude toward risk in which an increased return would
be required for an increase in risk. (Chapters 1 and 5)
risk-free rate of interest, RF: The required return on a risk-free asset, typically
a 3-month U.S. Treasury bill. (Chapter 5)
risk-indifferent: The attitude toward risk in which no change in return would
be required for an increase in risk. (Chapter 5)
risk-seeking: The attitude toward risk in which a decreased return would
be accepted for an increase in risk. (Chapter 5)
S corporation (S corp): See Table 1.2. (Chapter 1)
safety stock: Extra inventory that is held to prevent stockouts of
important items. (Chapter 14)
sale-leaseback arrangement: A lease under which the lessee sells an asset for cash to a
prospective lessor and then leases back the same asset, making fixed
periodic payments for its use. (Chapter 16)
sales forecast: The prediction of the firm's sales over a given period,
based on external and/or internal data; used as the key input to the short-term
financial planning process. (Chapter 3)
scenario analysis: A behavioral approach that evaluates the impact on the firm's
return of simultaneous changes in a number of variables. (Chapter 10)
seasonal funding requirement: An investment in operating assets that varies over time as
a result of cyclic sales. (Chapter 14)
secondary market: Financial market in which preowned securities (those that
are not new issues) are traded. (Chapter 1)
secured creditors: Creditors who have specific assets pledged as collateral
and, in liquidation of the failed firm, receive proceeds from the sale of those
assets. (Chapter 17)
secured short-term financing: Short-term financing (loan) that has specific assets
pledged as collateral. (Chapter 15)
Securities and Exchange Commission
(SEC): The federal regulatory body that
governs the sale and listing of securities. (Chapter 2)
securities exchanges: Organizations that provide the marketplace in which firms
can raise funds through the sale of new securities and purchasers can resell
securities. (Chapter 1)
security agreement: The agreement between the borrower and the lender that
specifies the collateral held against a secured loan. (Chapter 15)
security market line (SML): The depiction of the capital asset pricing model (CAPM)
as a graph that reflects the required return in the marketplace for each level
of nondiversifiable risk (beta). (Chapter 5)
selling group: A large number of brokerage firms that join the originating
investment banker(s); each accepts responsibility for selling a certain portion
of a new security issue on a commission basis. (Chapter 7)
semiannual compounding: Compounding of interest over two periods within the year.
(Chapter 4)
sensitivity analysis: An approach for assessing risk that uses several
possible-return estimates to obtain a sense of the variability among outcomes.
(Chapter 5)
shark repellents: Antitakeover amendments to a corporate charter that
constrain the firm's ability to transfer managerial control of the firm as a
result of a merger. (Chapter 17)
short-term (operating) financial
plans: Specify short-term financial
actions and the anticipated impact of those actions. (Chapter 3)
short-term financial management: Management of current assets and current liabilities.
(Chapter 14)
short-term, self-liquidating loan: An unsecured short-term loan in which the use to which the
borrowed money is put provides the mechanism through which the loan is repaid.
(Chapter 15)
signal: A financing action by management that is believed to
reflect its view of the firm's stock value; generally, debt financing is viewed
as a positive signal that management believes the stock is
"undervalued," and a stock issue is viewed as a negative signal
that management believes the stock is "overvalued." (Chapter 12)
simulation: A statistics-based behavioral approach that applies
predetermined probability distributions and random numbers to estimate risky
outcomes. (Chapter 10)
single-payment note: A short-term, one-time loan made to a borrower who needs
funds for a specific purpose for a short period. (Chapter 15)
sinking-fund requirement: A restrictive provision often included in a bond indenture,
providing for the systematic retirement of bonds prior to their maturity.
(Chapter 6)
small (ordinary) stock dividend: A stock dividend representing less than 20 to 25 percent of
the common stock outstanding when the dividend is declared. (Chapter 13)
sole proprietorship: A business owned by one person and operated for his or her
own profit. (Chapter 1)
spin-off: A form of divestiture in which an operating unit becomes an
independent company through the issuance of shares in it, on a pro rata basis,
to the parent company's shareholders. (Chapter 17)
spontaneous liabilities: Financing that arises from the normal course of business;
the two major short-term sources of such liabilities are accounts payable and
accruals. (Chapter 15)
spot exchange rate: The rate of exchange between two currencies on any given
day. (Chapter 18)
stakeholders: Groups such as employees, customers, suppliers, creditors,
owners, and others who have a direct economic link to the firm. (Chapter 1)
standard debt provisions: Provisions in a bond indenture specifying certain
record-keeping and general business practices that the bond issuer must follow;
normally, they do not place a burden on a financially sound business. (Chapter
6)
standard deviation [[sigmak]]: The most common statistical indicator of an asset's risk;
it measures the dispersion around the expected value. (Chapter 5)
statement of cash flows: Provides a summary of the firm's operating, investment, and
financing cash flows and reconciles them with changes in its cash and
marketable securities during the period. (Chapter 2)
statement of retained earnings: Reconciles the net income earned during a given year, and
any cash dividends paid, with the change in retained earnings between the start
and the end of that year. (Chapter 2)
stock dividend: The payment, to existing owners, of a dividend in the form
of stock. (Chapter 13)
stock options: An incentive allowing managers to purchase stock at the
market price set at the time of the grant. (Chapter 1)
stock purchase warrants: Instruments that give their holders the right to purchase a
certain number of shares of the issuer's common stock at a specified price over
a certain period of time. (Chapter 6 and 16)
stock repurchase: The repurchase by the firm of outstanding common stock in
the marketplace; desired effects of stock repurchases are that they either
enhance shareholder value or help to discourage an unfriendly takeover.
(Chapter 13)
stock split: A method commonly used to lower the market price of a
firm's stock by increasing the number of shares belonging to each shareholder.
(Chapter 13)
stock swap transaction: An acquisition method in which the acquiring firm exchanges
its shares for shares of the target company according to a predetermined ratio.
(Chapter 17)
stockholders: The owners of a corporation, whose ownership, or equity,
is evidenced by either common stock or preferred stock. (Chapter 1)
stockholders' report: Annual report that publicly owned corporations must provide
to stockholders; it summarizes and documents the firm's financial activities
during the past year. (Chapter 2)
straight bond: A bond that is nonconvertible, having no conversion
feature. (Chapter 16)
straight bond value: The price at which a convertible bond would sell in the
market without the conversion feature. (Chapter 16)
straight preferred stock: Preferred stock that is nonconvertible, having no
conversion feature. (Chapter 16)
strategic merger: A merger transaction undertaken to achieve economies of
scale. (Chapter 17)
stretching accounts payable: Paying bills as late as possible without damaging the
firm's credit rating. (Chapter 15)
striking price: The price at which the holder of a call option can buy (or
the holder of a put option can sell) a specified amount of stock at any time
prior to the option's expiration date. (Chapter 16)
subordinated debentures: See Table 6.3 (Chapter 6)
subordination: In a bond indenture, the stipulation that subsequent
creditors agree to wait until all claims of the senior debt are
satisfied. (Chapter 6)
subsidiaries: The companies controlled by a holding company. (Chapter 17)
sunk costs: Cash outlays that have already been made (past outlays) and
therefore have no effect on the cash flows relevant to a current decision.
(Chapter 8)
supervoting shares: Stock that carries with it multiple votes per share rather
than the single vote per share typically given on regular shares of common
stock. (Chapter 7)
takeover defenses: Strategies for fighting hostile takeovers. (Chapter 17)
target capital structure: The desired optimal mix of debt and equity financing that
most firms attempt to maintain. (Chapter 11)
target company: The firm in a merger transaction that the acquiring company
is pursuing. (Chapter 17)
target dividend-payout ratio: A dividend policy under which the firm attempts to pay out
a certain percentage of earnings as a stated dollar dividend and adjusts
that dividend toward a target payout as proven earnings increases occur.
(Chapter 13)
target weights: Either book or market value weights based on desired
capital structure proportions. (Chapter 14)
tax loss carryback/carryforward: A tax benefit that allows corporations experiencing
operating losses to carry tax losses back up to 2 years and forward
for as many as 20 years. (Chapter 1)
tax loss carryforward: In a merger, the tax loss of one of the firms that can be
applied against a limited amount of future income of the merged firm over 20
years or until the total tax loss has been fully recovered, whichever comes
first. (Chapter 17)
tax on sale of old asset: Tax that depends on the relationship among the old asset's
sale price, initial purchase price, and book value, and on existing
government tax rules. (Chapter 8)
technical insolvency: Business failure that occurs when a firm is unable to pay
its liabilities as they come due. (Chapter 17)
technically insolvent: Describes a firm that is unable to pay its bills as they
come due. (Chapter 14)
tender offer: A formal offer to purchase a given number of shares of a
firm's stock at a specified price. (Chapter 13)
term structure of interest rates: The relationship between the interest rate or rate of
return and the time to maturity. (Chapter 6)
terminal cash flow: The after-tax nonoperating cash flow occurring in the final
year of a project. It is usually attributable to liquidation of the project.
(Chapter 8)
time line: A horizontal line on which time zero appears at the
leftmost end and future periods are marked from left to right; can be used to
depict investment cash flows. (Chapter 4)
times interest earned ratio: Measures the firm's ability to make contractual interest
payments; sometimes called the interest coverage ratio. (Chapter 2)
time-series analysis: Evaluation of the firm's financial performance over time
using financial ratio analysis. (Chapter 2)
total asset turnover: Indicates the efficiency with which the firm uses its
assets to generate sales. (Chapter 2)
total cost of inventory: The sum of order costs and carrying costs of inventory. (Chapter
14)
total leverage: The potential use of fixed costs, both operating and
financial, to magnify the effect of changes in sales on the firm's earnings
per share. (Chapter 12)
total risk: The combination of a security's nondiversifiable and
diversifiable risk. (Chapter 5)
transfer prices: Prices that subsidiaries charge each other for the goods
and services traded between them. (Chapter 10)
treasurer: The firm's chief financial manager, who is responsible for
the firm's financial activities, such as financial planning and fund raising,
making capital expenditure decisions, and managing cash, credit, the pension
fund, and foreign exchange. (Chapter 1)
treasury stock: The number of shares of outstanding stock that have been
repurchased by the firm. (Chapter 7)
trust receipt inventory loan: A secured short-term loan against inventory under which the
lender advances 80 to 100 percent of the cost of the borrower's relatively
expensive inventory items in exchange for the borrower's promise to repay the lender,
with accrued interest, immediately after the sale of each item of collateral.
(Chapter 15)
trustee: A paid individual, corporation, or commercial bank trust
department that acts as the third party to a bond indenture and can take
specified actions on behalf of the bondholders if the terms of the indenture
are violated. (Chapter 6)
two-bin method: Unsophisticated inventory-monitoring technique that is
typically applied to C group items and involves reordering inventory when one
of two bins is empty. (Chapter 14)
two-tier offer: A tender offer in which the terms offered are more
attractive to those who tender shares early. (Chapter 17)
U.S. Treasury bills (T-bills): Short-term IOUs issued by the U.S. Treasury; considered the
risk-free asset. (Chapter 5)
underpriced: Stock sold at a price below its current market price, P0.
(Chapter 11)
underwriting syndicate: A group formed by an investment banker to share the
financial risk associated with underwriting new securities. (Chapter 7)
underwriting: The role of the investment banker in bearing the
risk of reselling, at a profit, the securities purchased from an issuing
corporation at an agreed-on price. (Chapter 7)
unitary tax laws: Laws in some U.S. states that tax multinationals (both U.S.
and foreign) on a percentage of their total worldwide income rather than
solely on the MNCs' earnings arising within their jurisdiction. (Chapter 18)
unlimited funds: The financial situation in which a firm is able to accept
all independent projects that provide an acceptable return. (Chapter 8)
unlimited liability: The condition of a sole proprietorship (or general
partnership) allowing the owner's total wealth to be taken to satisfy
creditors. (Chapter 1)
unsecured short-term financing: Short-term financing obtained without pledging specific
assets as collateral. (Chapter 15)
unsecured, or general, creditors: Creditors who have a general claim against all the firm's
assets other than those specifically pledged as collateral. (Chapter 17)
valuation: The process that links risk and return to determine the
worth of an asset. (Chapter 6)
variable-growth model: A dividend valuation approach that allows for a change in
the dividend growth rate. (Chapter 7)
venture capital: Privately raised external equity capital used to fund
early-stage firms with attractive growth prospects. (Chapter 7)
venture capitalists (VCs): Providers of venture capital; typically, formal businesses
that maintain strong oversight over the firms they invest in and that have
clearly defined exit strategies. (Chapter 7)
vertical merger: A merger in which a firm acquires a supplier or a
customer. (Chapter 17)
voluntary reorganization: A petition filed by a failed firm on its own behalf for
reorganizing its structure and paying its creditors. (Chapter 17)
voluntary settlement: An arrangement between a technically insolvent or bankrupt
firm and its creditors enabling it to bypass many of the costs involved in
legal bankruptcy proceedings. (Chapter 17)
warehouse receipt loan: A secured short-term loan against inventory under which the
lender receives control of the pledged inventory collateral, which is stored by
a designated warehousing company on the lender's behalf. (Chapter 15)
warrant premium: The difference between the market value and the theoretical
value of a warrant. (Chapter 16)
weighted average cost of capital
(WACC), ka:
Reflects the expected average future cost of funds over the long run; found by
weighting the cost of each specific type of capital by its proportion in the
firm's capital structure. (Chapter 11)
weighted marginal cost of capital
(WMCC): The firm's weighted average cost of
capital (WACC) associated with its next dollar of total new financing.
(Chapter 11)
weighted marginal cost of capital
(WMCC) schedule: Graph that relates the firm's
weighted average cost of capital to the level of total new financing. (Chapter
11)
white knight: A takeover defense in which the target firm finds an
acquirer more to its liking than the initial hostile acquirer and prompts the
two to compete to take over the firm. (Chapter 17)
wire transfer: An electronic communication that, via bookkeeping entries,
removes funds from the payer's bank and deposits them in the payee's bank.
(Chapter 14)
working capital: Current assets, which represent the portion of investment
that circulates from one form to another in the ordinary conduct of business.
(Chapter 14)
World Trade Organization (WTO): International body that polices world trading practices and
mediates disputes between member countries. (Chapter 18)
yield curve: A graph of the relationship between the debt's remaining
time to maturity (x axis) and its yield to maturity (y axis); it
shows the pattern of annual returns on debts of equal quality and different
maturities. Graphically depicts the term structure of interest rates.
(Chapter 6)
yield to maturity (YTM): The rate of return that investors earn if they buy a bond
at a specific price and hold it until maturity. (Assumes that the issuer makes
all scheduled interest and principal payments as promised.) (Chapter 6)
zero- (or low-) coupon bonds: See Table 6.4 (Chapter 6)
zero-balance account (ZBA): A disbursement account that always has an end-of-day
balance of zero because the firm deposits money to cover checks drawn on the
account only as they are presented for payment each day. (Chapter 14)
zero-growth model: An approach to dividend valuation that assumes a constant,
nongrowing dividend stream. (Chapter 7)
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