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FSM
D076A Finance Skills for Managers Vocabulary
| Term | Definition |
|---|---|
| Accounting | The system of recording, reporting, and summarizing past financial information and transactions. |
| Accounts Receivable Turnover (AR Turnover) | An activity ratio found by credit sales divided by accounts receivable. |
| Activity Ratios | Activity Ratios |
| Additional Funds Needed (AFN) | Another name for the discretionary financing needed or external financing needed. It represents the additional financing needed given a firm’s expectations for future growth. |
| Affirmative Covenants | A bond covenant that describes things the company pledges itself to do in order to protect bondholders. |
| Agency Costs | Costs that are incurred when management does not act in the best interest of shareholders. |
| Agency Problem | When the agent (the management) does not act in the best interest of the principal (the owners). |
| Aggressive Assets | Companies or securities with beta greater than 1. |
| Annual Percentage Rate | The annual interest rate that is charged for borrowing money or that is earned through investment. |
| Annuity | A stream of cash flows of an equal amount paid every consecutive period. |
| Annuity Due | A series of equal payments made at the beginning of consecutive periods. |
| Asset Pricing | The process of valuing assets. |
| Auction Market | A secondary market with a physical location and where prices are determined by investors’ willingness to pay. |
| Average Collection Period (ACP) | An activity ratio found by the number of days in a year (365) divided by AR turnover. |
| Balance Sheet Forecasting | Using sales growth and the profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances. |
| Banks and Credit Unions | Receive deposits and extend loans to individuals and businesses. |
| Benchmarking | The process of completing a financial analysis to compare a firm’s financial performance to that of other similar firms. |
| Beta | A variable that describes how the price of a security varies with the market. |
| Bid-ask Spread | The difference between the bid and ask prices that compensate the specialist for the risk that he or she bears for willingness to provide liquidity. |
| Board of Directors | A group of people who jointly supervise the activities of an organization. |
| Bond Indenture | A legal contract that governs the relationship between a firm and its bondholders. |
| Bondholders | A person who loans a corporation money by buying debt securities. |
| Business Finance | An area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources. |
| Cannibalization | The reduction in sales of a company’s own products due to introduction of another similar product. |
| Capital | A financial asset that can be used by a firm or individual. Examples of capital may be machinery or cash held by a firm. |
| Capital Asset Pricing Model (CAPM) | A model used to determine the risk-return relationship for an asset. |
| Capital Budgeting | The process of evaluation and planning for purchases of long-term assets. |
| Capital Budgeting Criteria | Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment. |
| Capital Investment | The sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth. |
| Capital Markets | A type of financial market used for long-term assets that are held for greater than one year. |
| Capital Structure | The mixture of debt and equity used to finance a firm. |
| Capital-constrained Environment | When a limited amount of funds are available. |
| Cash Budgets | A plan for controlling cash inflows and outflows business to balance income with expenditures. |
| Cash Management | Managing the day-to-day finance operations of a firm. |
| Central Banks | Ensure that a nation’s economy remains healthy by controlling the amount of money circulating in the economy. |
| Common Stock | A type of stock that represents equity in a firm and confers the right to vote at shareholder meetings. |
| Compounding | Finding a future value given a present value. |
| Compounding Interest | The interest on the principal plus the interest on earned interest. |
| Corporate Bonds | A debt instrument that is issued by a corporation in order to raise capital. |
| Corporate Governance | The system of rules, practices, and processes by which a firm is directed and controlled. |
| Correlation | The measure of the relationship between two variables that move in relation to each other. |
| Cost of Capital | The cost to a firm to use an investor’s capital; see interest rate. |
| Coupon Rate | The stated interest rate of a bond; also known as coupon yield. |
| Coupon Yield | The stated interest rate of a bond; also known as coupon rate. |
| Covenants | Statements in a bond indenture that outline things the company will obligate itself to do or not do in order to protect bondholders. |
| Credit Analysts | A commercial bank position with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients. |
| Cross-sectional Analysis | Comparing a firm’s financial ratios to other firms’ ratios or industry averages. |
| Cumulative | A feature of preferred stock specifying that if a company skips payment of a preferred stock dividend one year, it is still required to pay that dividend sometime in the future before paying any common dividends. |
| Current Market Value | What someone would pay right now for an asset. |
| Current Ratio | A liquidity ratio found by current assets divided by current liabilities. |
| Dealer Market | A secondary market made up of multiple dealers that hold an inventory of securities and quote prices. |
| Debt Ratio | A financing ratio found by total liabilities divided by total assets. |
| Debt-to-equity Ratio | A financing ratios found by total liabilities divided by total equity. |
| Default | Failure to meet a debt obligation. |
| Default Risk | The probability of a loss resulting from a borrower’s failure to repay a contractual obligation; also called credit risk. |
| Defensive Assets | Companies or securities with beta less than 1. |
| Discount Bond | A bond whose price is below its par value. |
| Discount Rate | The name for interest rate when used in time value of money calculations. |
| Discounting | Finding a present value given a future value. |
| Discretionary Accounts | Accounts that do not vary automatically with sales but are left to the discretion of management. |
| Discretionary Financing Needed (DFN) | The additional financing needed given a firm’s expectations for future growth. |
| Diversification | The process of “spreading” your money over many different assets. |
| Dividend Discount Model | A model used to evaluate common stock that calculates the value of a share of common stock today by taking the present value of future dividend cash flows. |
| Dividends in Arrears | A feature of preferred stock specifying that if a company ignores preferred stock dividends, it cannot pay anything to its common stockholders. |
| DuPont Framework | An expanded formula of the return of equity, net margin times total asset turnover times leverage multiplier, which represent the components of profitability, activity (efficiency), and financing. |
| Efficient market | A market in which prices fully reflect all the available information about a specific security. |
| Estates | Everything that a person owns or controls, especially at death. |
| Ethical Dilemma | An issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint. |
| Ethics | Following accepted standards of moral conduct. |
| Expected Return | A hypothesized estimate of future prices or returns under different scenarios based on expectational data. |
| External Financing Needed (EFN) | Another name for the discretionary financing needed or additional funds needed. It represents the additional financing needed given a firm’s expectations for future growth. |
| Face Value | The sum of money that a corporation promises to pay at the expiration of a bond; also called par value. |
| Finance | The study of managing and allocating funds at the personal or business level. |
| Financial Institutions | An area of finance that includes firms or organizations that exist to accept a wide variety of deposits, to offer investment products to individuals and businesses, to provide loans, or to broker financial transactions. |
| Financial Managers | A person who makes strategic financial decisions in a corporation. |
| Financial Policy Implementation | Incorporating new finance ideas within a firm. |
| Financial Risk | Increased volatility in earnings as a result of using debt. |
| Firm-specific Risk | Risk that results from factors at a particular firm and can be reduced through diversification; also called nonsystematic risk or idiosyncratic risk. |
| Fisher Effect | An economic theory developed by Irving Fisher holding that the real interest rate is equivalent to the nominal interest rate minus the expected inflation rate. |
| Fixed Asset Turnover (FAT) | An activity ratio found by sales divided by fixed assets. |
| Fixed Expenditures | An expense that you do not have direct control over and that remains constant from period to period. |
| Fixed-income Securities | Another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year. |
| Future Value | The worth of cash flows in terms of the dollar amount in the relative future. |
| Gordon Growth Model | A formula used to value common stock based on the assumptions that dividends are paid every year and grow at constant rate forever. |
| Gross Margin | A profitability ratio found by gross profit divided by sales. |
| Harvest | Generating cash or stock from the sales or IPO of companies in the portfolio of investments. |
| Holding Period Return | The return over the entire period that an investor owns a financial security. |
| Hurdle Rate | The required rate of return that a company expects to earn in order to consider a project. |
| Hybrid Security | A security that has some elements that resemble equity and others that resemble debt. |
| Idiosyncratic Risk | Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or nonsystematic risk. |
| Incremental Cash Flows | Cash flows that result from accepting a project. |
| Inflation | The rate at which the average price level of a basket of chosen goods and services in an economy increases over a period of time. |
| Initial Public Offering (IPO) | When a privately held company first offers shares of stock to outside investors to raise capital, therefore becoming a publicly owned company. |
| Insurance Companies | Charge premiums to invest in bonds and stocks to pay claims. |
| Interest Rate | The percentage of the principal that a lender charges a borrower for the use of assets. |
| Interest Rate Risk | The probability that changes in interest rates will impact the value of a bond. |
| Internal Rate of Return (IRR) | The rate of return that a firm earns on its capital projects. |
| Intrinsic Value | The value of an asset as determined through fundamental analysis without referring to the asset’s market value. |
| Inventory Turnover | An activity ratio found by COGS divided by inventory. |
| Investment Bank | A financial intermediary that offers complex financial transactions such as underwriting, facilitating mergers, and buying and selling financial securities on behalf of large institutions. |
| Investments | An area of finance that involves deciding which assets to invest in to create wealth in the future. |
| Legal | Following the laws and rules set by an authority. |
| Leverage | Another name for debt or liability. |
| Leverage Ratios | A category of ratios that consider how a firm is financed. |
| Liquid Asset | An asset that can be converted into cash quickly without the loss of significant value. |
| Liquidity | The ability to turn financial securities into cash easily without losing significant value. |
| Liquidity Ratios | A category of ratios that measure a firm’s ability to meet short-term obligations. |
| Market Capitalization | The current market value of a publicly traded company’s total outstanding shares, indicating the size of a company. |
| Market Ratios | A category of ratios that are used to evaluate the current share price of a public firm’s stock. |
| Market Risk | Risk that is inherent in the economy as a whole and cannot be diversified away; also called systematic risk or nondiversifiable risk. |
| Market-to-book Ratio (M/B Ratio) | A market ratio found by market value of equity divided by book value of equity. |
| Marketing | The business function responsible for generating sales. |
| Maturity Date | The date at which a bond expires. |
| Money Market | A type of financial market used for short-term assets that are held for less than one year. |
| Morals | Following one’s standards of right and wrong behavior. |
| Mutual Fund | An investment company that continually offers investments and buys financial securities and instruments on behalf of investors. |
| Mutually Exclusive | When two or more events do not coincide. |
| NASDAQ | A computer network where stocks are bought and sold. It is the second-largest stock exchange in the world. Typically, technology-related companies will go public through this exchange. |
| Negative Covenants | A bond covenant that describes things the company pledges itself not to do in order to protect bondholders. |
| Net Margin | The percentage of sales remaining after all costs have been deducted from a company's total sales. Also known as net profit margin; indicates the profit earned by the firm. |
| New York Stock Exchange (NYSE) | A physical trading floor and a computer network where stocks are bought and sold. It is the largest stock exchange in the world. |
| Nominal Rate | The rate at which invested money grows for a certain period of time. |
| Nondiversifiable Risk | Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or systematic risk. |
| Nonsystematic Risk | Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or idiosyncratic risk. |
| Operating Income Return | On Investment (OIROI) An activity ratio found by operating income divided by total assets. |
| Operating Margin | A profitability ratio found by EBIT profit divided by sales. |
| Opportunity Cost | The loss of potential gain from other alternatives when one alternative is chosen. |
| Ordinary Annuity | A series of equal payments made at the end of consecutive periods over a fixed length of time. |
| Par Bond | A bond whose price is exactly equal to its par value. |
| Par Value | The sum of money that a corporation promises to pay at the expiration of a bond; also called face value. |
| Payout Ratio | The percent of net income distributed to the shareholders. |
| Pension Fund | A financial institution that specializes in managing and administering retirement funds. |
| Perpetuity | A constant stream of identical cash flows that continues forever. |
| Perpetuity Model | A formula used to value preferred stock that is based on the calculation of a perpetuity. |
| Personal Bankers | A commercial bank position with the responsibility to find and attract new clients. |
| Plowback Ratio | The percent of net income retained in the firm; also called the retention ratio. |
| Preferred Stock | A hybrid security that has no fixed maturity, has fixed payments, and does not confer voting rights on bondholders. |
| Premium Bond | A bond whose price is above its par value. |
| Present Value | The worth of cash flows in terms of the dollar amount in the relative past. |
| Price Risk | The potential for the decline in the price of a financial security or an asset relative to the market. |
| Price-to-earnings Ratio (P/E Ratio) | A market ratio found by price per share divided by earnings per share. |
| Primary Market | The financial market where securities (stocks and/or bonds) are first sold. |
| Private Equity | A financial institution that invests in an entity that is not publicly listed or traded using money received from institutional investors and wealthy individuals. |
| Privately Held Companies | Firms that have not issued shares to the public where the ownership rights are privately held. |
| Pro Forma Statements | A financial statement that projects an estimate for future periods “as if” sales grew as predicted. |
| Profit Forecasting | The projection of future earnings after all projected costs are subtracted from projected sales. |
| Profitability Index (PI) | The ratio of payoff to investment for a proposed project. |
| Profitability Ratios | A category of ratios that are commonly used to directly judge how well management is doing as they strive to maximize owner wealth. |
| Publicly Traded Firms | Firms that have issued shares to the public. |
| Quick Ratio | A liquidity ratios found by current assets less inventory, divided by current liabilities; also called the acid-test ratio. |
| Real Rate | An interest rate that is adjusted to remove the effects of inflation. |
| Required Rate of Return | The minimum return or compensation an investor requires in order to invest; see interest rate. |
| Research and Development | The business function responsible for improving and developing services and products. |
| Retention Ratio | The percent of net income retained in the firm; also called the plowback ratio. |
| Return | The money gained or lost on an investment over a certain period of time. |
| Return On Assets (ROA) | A profitability ratio found by net income divided by total assets. |
| Return On Equity (ROE) | A profitability ratio found by net income divided by owners’ equity. |
| Revenues | The top line of the income statement. The total amount of money a business brings in (before subtracting any costs). |
| Risk | The possibility that the realized or actual return will differ from the expected return. |
| Risk Avoidance | A way to manage risk by not performing an activity that may carry risk. |
| Risk Premium | The compensation for the amount of risk taken on by investors. |
| Risk Reduction | A series of techniques that help reduce the amount of risk a person is exposed to by taking a particular action. |
| Risk Retention | A decision to take responsibility for a particular risk. |
| Risk Separation | A risk management technique that involves dispersing assets geographically instead of concentrating them in one location. |
| Risk Transfer | A risk management technique that involves reducing the amount of risk you are exposed to by transferring that risk to another entity. |
| Risk-free Rate | The rate of return on an investment with no risk. |
| Sales | The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs). |
| Seasonal Firms | Firms whose performance varies according to the season. |
| Secondary Market | The financial market where securities are traded after the initial issuance. |
| Securitization | The process of combining several types of contractual debt (such as mortgages) and reselling them as a package to investors. |
| Shareholders | A person who owns shares of a company’s stock. |
| Simple Interest | The interest earned only on the principal. |
| Specialist | A market maker on the NYSE that holds an inventory of securities and acts as a liquidity provider to those that wish to buy and sell. |
| Spontaneous Accounts | Accounts that vary naturally with sales. |
| Stakeholder | Anyone who may be affected by actions taken or a decision made. |
| Standard Deviation | A measure of dispersion of possible outcomes about the mean. |
| Steady State Growth | The level of growth where four key financial ratios—profitability, asset utilization, leverage, and payout—are constant and where the firm does not need to issue any new equity to fund the growth. |
| Stock | A share of ownership in a company. |
| Sunk Costs | A cost that has already been incurred and cannot be recovered. |
| Sustainable Growth Rate (SGR) | The growth rate that allows a firm to maintain its present financial ratios without issuing new equity. |
| Syndicate | A group of intermediaries that is used to oversee the issuance of stocks and/or bonds. |
| Systematic Risk | Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or nondiversifiable risk. |
| Tax Strategies | Methods used to minimize the amount of taxes a business pays. |
| Teller | An entry-level commercial bank position with the reponsibility to interact with customers at the bank’s front desk or drive-through window. |
| Time Value of Money (TVM) | The idea that money that is available at the present time is worth more than the same amount in the future. |
| Times Interest Earned (TIE) | A financing ratio found by EBIT divided by interest expenses. |
| Total Asset Turnover (TAT) | An activity ratio found by sales divided by total assets. |
| Treasury Bill | A bill issued by the U.S. government as a financial security with no interest and a maturity of less than one year; abbreviated T-bill. |
| Treasury Note | A note issued by the U.S. government as a financial security with a fixed interest rate and a short maturity between 1 and 10 years; abbreviated T-note. |
| Treasury Securities | A debt instrument (bond) that is issued by the United States government in order to raise capital. |
| Trend Analysis | Comparing a firm’s ratios across time. |
| Trusts | An arrangement that allows a third party to hold assets on behalf of a beneficiary or beneficiaries. |
| U.S Securities and Exchange Commission (SEC) | An independent federal government agency that (1) protects investors, (2) maintains fair, orderly, and efficient markets, and (3) facilitates capital formation. |
| U.S Treasuries | Bonds, bills, and notes issued by the U.S. government; considered to be the highest-quality securities available. |
| Upside Potential | The unlimited earnings potential of equity ownership. |
| Utility | The total satisfaction received from consuming goods and services. |
| Variable Expenditures | An expense that you have direct control over and that can change from period to period. |
| Venture Capitalists (VCs) | Professional managers of investment capital that typically invest in very young new ventures. |
| Wills | A legal expression of an individual’s wishes concerning the desposition of his or her property after death. |
| Yield to Maturity (YTM) | The rate of return that investors receive on a bond if they purchase a bond today at the market price and hold it until it matures; the required rate of return given the maturity and risk of the bond. |
| 1. Accounting | The process of recording, reporting, and summarizing past financial transactions to present a historical view of an organization’s performance. |
| Asset Management | The management of investment portfolios to maximize returns and meet financial objectives. |
| Asset Pricing | The practice of estimating the value of assets that have uncertain future payoffs. |
| Budgeting | The process of creating a plan to spend money, allocating income toward expenses and savings. |
| Capital Structure | The mix of debt and equity used by a firm to finance its operations and growth. |
| Compliance Manager | A professional responsible for ensuring that a company adheres to financial regulations and standards. |
| Corporate Finance (also Business Finance or Managerial Finance) | A field focused on how organizations raise and allocate capital, manage financial planning, and make strategic decisions to increase value. |
| Credit Union | A member-owned financial institution that provides services like savings and loans. |
| Financial Advisor | A professional who offers financial planning and investment advice to individuals or organizations. |
| Financial Engineering | The use of mathematical techniques to solve financial problems and create new financial products. |
| Financial Institutions | Organizations that manage money flow and provide financial services, including banks, insurance companies, and pension funds. |
| Financial Planning | The process of setting and managing personal financial goals through budgeting, saving, investing, and risk management. |
| Forecasting | Predicting future financial outcomes based on current and historical data. |
| Hedge Fund Analyst | A financial professional who evaluates investments and strategies for hedge funds. |
| Insurance Company | A financial institution that provides risk management in the form of insurance policies. |
| Investments | A finance subspecialty that involves selecting assets, managing portfolios, and evaluating risk to build wealth. |
| Loan Officer | A professional who evaluates and approves loan applications from individuals or businesses. |
| Managerial Finance | Another term for corporate or business finance; involves financial decision-making within organizations. |
| Mortgage Company | A firm that provides home loans and other types of real estate financing. |
| Mutual Fund Analyst | An investment professional who analyzes fund performance and makes investment recommendations. |
| Pension Fund | A financial institution that manages retirement savings on behalf of employees. |
| Personal Finance | The management of individual or household financial activities, including budgeting, investing, and saving. |
| Portfolio Manager | A professional responsible for managing investment portfolios and making decisions about asset allocation. |
| Real Estate Finance | A finance specialty focused on property investment, valuation, and development. |
| Risk Analyst | A professional who evaluates financial risk and recommends ways to mitigate it. |
| Saving | Setting aside money for future use, often in a bank account or low-risk investment. |
| Sourcing Capital | The process of obtaining funds to finance business operations or investments, typically through debt or equity. |
| Venture Capital | A type of private equity focused on funding start-up or early-stage companies with high growth potential. |
| 2. Business Finance | The area of finance that focuses on managing financial decisions within organizations to maximize owner or shareholder wealth through investment and financing decisions. |
| Cost-Benefit Analysis | A decision-making process that compares the costs and benefits of a financial choice to determine whether the action is worthwhile. |
| Equity | A method of financing in which a company raises capital by selling shares of ownership (stock) to investors. |
| Financial Manager | A professional responsible for managing a firm’s financial activities—including investment and financing decisions—to increase firm value. |
| Financial Planning | The process of setting financial goals and determining how to achieve them through budgeting, saving, and investing. |
| Financing Decision | A business decision concerning how to raise capital to fund operations or investments, such as through loans, bonds, or issuing equity. |
| Investment Decision | The process of evaluating and selecting assets or projects that are expected to generate value and contribute to a firm’s or individual's future financial goals. |
| Loan | Borrowed money that must be repaid with interest, commonly used to finance large purchases like homes or vehicles. |
| Owner Wealth | The value that a privately held company provides to its owner(s); in business finance, maximizing owner wealth is a key objective. |
| Personal Finance | The management of an individual's or household’s financial activities, such as budgeting, saving, investing, and goal setting to maximize personal satisfaction (utility). |
| Public Company | A company whose shares are traded on a public stock exchange and is owned by numerous shareholders. |
| Retirement Savings | Funds set aside over time to support oneself financially after retiring from work; often involves long-term investing. |
| Shareholder Wealth | The value created for shareholders in a publicly traded company, often measured through stock price appreciation and dividends. |
| Utility | A concept in economics representing personal satisfaction or happiness derived from consuming goods and services or achieving financial goals. |
| 3. Angel Investing | A form of private equity where individuals invest their own money in early-stage startups with high growth potential, typically in exchange for equity. |
| Associate | A mid-level role in finance (often in investment banking or private equity), usually filled by individuals with an MBA or equivalent experience; bridges junior analysts and senior management. |
| Chief Financial Officer (CFO) | The senior executive responsible for managing all financial actions of a company, including planning, risk management, and financial reporting. |
| Commercial Banking | A sector that offers basic financial services to individuals and businesses, such as accepting deposits, providing loans, and issuing mortgages. |
| Corporate Finance | A subspecialty of finance focused on how companies manage their financial activities, including capital budgeting, financial planning, and increasing firm value. |
| Credit Analyst | A professional in commercial banking who assesses the risk of lending to borrowers and determines loan terms. |
| Debt Financing | Raising capital by borrowing, typically through loans or issuing bonds, which must be repaid over time with interest. |
| Equity Financing | Raising capital by issuing shares of ownership in the company; shareholders receive a portion of profits and may gain voting rights. |
| Financial Analyst | An entry-level corporate finance role responsible for analyzing financial data to support strategic business decisions. |
| Financial Planning | A career path and process that helps individuals meet financial goals through budgeting, saving, investing, and managing taxes and estates. |
| Financing Decisions | Decisions made by financial managers on how to raise the funds needed to invest in projects, such as through equity, debt, or internal cash reserves. |
| Insurance | A field of finance that focuses on assessing and managing risk by pooling premiums to cover potential losses; includes roles like underwriter and risk manager. |
| Investment Banking | A finance career that assists companies in raising capital, executing mergers and acquisitions, and conducting sales and trading activities. |
| Investment Decisions | Financial choices made by managers about where to allocate resources for maximum return; involves evaluating potential projects or assets. |
| Leveraged Buyouts (LBOs) | A private equity strategy involving the acquisition of a company using a significant amount of borrowed money, often secured by the assets of the company being acquired. |
| Managing Working Capital | Overseeing day-to-day business finances such as cash flow, inventory, and short-term liabilities to ensure the company remains solvent and efficient. |
| Mergers and Acquisitions (M&A) | A specialization in investment banking where firms are advised and supported through the process of buying, selling, or combining with other companies. |
| Principal | A senior role in private equity responsible for leading deals and managing portfolios, usually with the authority to sit on boards and guide strategic investments. |
| Private Equity (PE) | A sector of finance involving investments in private companies, typically through venture capital, angel investing, or buyouts. |
| Real Estate Finance | The field of finance concerned with property investment, valuation, and development, including both residential and commercial real estate. |
| Retained Earnings | Profits that a company keeps rather than distributing to shareholders; may be used to finance future investments. |
| Risk Manager | A professional who identifies, evaluates, and mitigates financial risks faced by a company or insurance firm. |
| Teller | An entry-level role in commercial banking, handling routine transactions like deposits, withdrawals, and payments for customers. |
| Underwriter | An insurance professional who assesses the risk of insuring clients and determines premium levels based on statistical analysis. |
| Venture Capital | A subset of private equity focused on investing in startup companies with strong growth potential, usually in exchange for equity and future profits. |
| 4. Asset | A resource with economic value (e.g., stocks, bonds, savings) that is expected to provide a return or benefit in the future. |
| Borrowing | Obtaining funds through a loan or credit with the agreement to repay the amount plus interest over time. |
| Budgeting | The process of tracking income and expenses to ensure spending does not exceed earnings; a key tool for managing personal cash flow. |
| Cash Flow | The movement of money in and out of your personal finances, including income, expenses, savings, and debt payments. |
| Certificate of Deposit (CD) | A savings product offered by banks that holds a fixed amount of money for a fixed period of time in exchange for interest. |
| Emergency Fund | A financial reserve set aside for unexpected expenses, typically stored in liquid, low-risk accounts like savings or CDs. |
| Expense | Any cost or spending of money, such as groceries, bills, or loan payments. |
| Financing | The process of obtaining funds for large purchases through loans, credit, or other financial instruments. |
| Financial Goal | A specific target related to money management, such as saving for a car, vacation, home, or retirement. |
| Forecasting | Predicting future financial conditions or performance based on past and current data, to make better decisions. |
| Income | Money received from work, investments, or other sources that is used to cover expenses and save for goals. |
| Investment | Committing money to an asset (such as stocks, bonds, or mutual funds) with the goal of generating returns over time. |
| Liquidity | The ease with which an asset can be quickly converted into cash without losing value—important for emergency funds. |
| Loan | Money borrowed from a bank or lender that must be repaid over time, usually with interest. |
| Mortgage | A specific type of loan used to finance the purchase of real estate, typically repaid in monthly installments. |
| Mutual Fund | An investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other assets. |
| Personal Finance | The practice of managing an individual’s or household’s money, including budgeting, saving, borrowing, and investing. |
| Return | The gain or loss from an investment, typically expressed as a percentage of the original investment amount. |
| Risk | The possibility of losing money on an investment or not achieving expected financial outcomes. |
| Savings Account | A bank account that earns interest and allows limited withdrawals; often used for storing emergency or short-term savings. |
| Utility | A term from economics referring to the satisfaction or happiness gained from consuming goods or achieving financial goals. |
| 5.Auction Market | A financial market where trades occur at a physical location and prices are determined by the highest bidder (e.g., NYSE). |
| Bondholders | Individuals or institutions that hold debt securities (bonds) and are prioritized over shareholders during liquidation. |
| Bonds | Debt instruments issued by governments or corporations to raise funds, repaid with interest over time. |
| Capital Market | A financial market used for long-term investments such as stocks and bonds. |
| Corporate Bonds | Bonds issued by corporations to raise capital, typically paying periodic interest and repaying principal at maturity. |
| Dealer Market | A market where securities are traded electronically through a network of dealers (e.g., NASDAQ), with no physical location. |
| Derivatives | Financial instruments whose value is derived from other underlying assets, such as options or futures. |
| Equity | Ownership interest in a company, typically in the form of stocks. |
| Financial Markets | Platforms or systems for buying and selling financial securities like stocks, bonds, and derivatives. |
| Financial Securities | Tradable financial instruments such as stocks, bonds, and derivatives. |
| Financial Regulation | Oversight by agencies like the SEC to ensure fair and transparent markets. |
| Initial Public Offering (IPO) | The first time a company issues shares to the public through the primary market. |
| Investment Banks | Financial institutions that help companies issue new securities and underwrite IPOs. |
| Lagging Indicator | An economic indicator that changes after the economy has already begun to follow a trend. |
| Limit Order | A trading order to buy or sell a security at a specified price or better. |
| Liquidity | The ease with which a financial asset can be bought or sold in the market without affecting its price. |
| Market Efficiency | A market condition in which prices fully reflect all available information. |
| Market Order | A trading order to buy or sell a security immediately at the best available current price. |
| Money Market | A financial market for short-term borrowing and lending, typically under one year. |
| Primary Market | The financial market where new securities are issued for the first time, such as through an IPO. |
| Price Discovery | The process through which market prices are determined based on supply and demand. |
| Regulation | Rules and oversight mechanisms designed to ensure fairness and transparency in financial markets. |
| Secondary Market | The financial market where previously issued securities (e.g., stocks and bonds) are traded among investors. |
| Securities | Tradable financial assets such as stocks, bonds, and derivatives. |
| Shareholders | Owners of shares in a company who are entitled to a portion of profits and assets. |
| Stock Market Return | The profit or loss made from investing in stocks, often used as a leading indicator of economic performance. |
| Stocks | Equity securities representing ownership in a corporation. |
| Treasury Securities | Bonds issued by the U.S. government to fund public spending, considered low-risk. |
| Trading Volume | The total number of shares or contracts traded for a security or market during a given period. |
| Underwriters | Investment banks or institutions that guarantee the sale of a company’s new securities and may purchase them to resell to investors. |
| Yield Curve | A graph that shows the interest rates of bonds across different maturity dates; used to forecast economic conditions. |
| 6.Asset Management | The professional management of investments such as stocks, bonds, and funds to grow client wealth. |
| Brokerage Services | Financial services that allow investors to buy and sell securities, typically through licensed firms or advisors. |
| Capital | Financial resources used by businesses to fund operations, projects, or growth. |
| Contractual Savings Institutions | Non-depository financial institutions that raise funds through long-term contracts, such as insurance policies and pension plans, and invest them in long-term assets. |
| Credit Union | A member-owned depository institution that provides savings accounts, loans, and other banking services, usually at favorable rates. |
| Depository Institution | A financial institution that accepts deposits, pays interest, and provides loans to individuals and businesses (e.g., banks, credit unions). |
| Equity Financing | The process of raising capital through the sale of shares in a company (as opposed to debt financing). |
| Financial Institution | An organization that manages and moves money by providing services like accepting deposits, issuing loans, and investing capital. |
| Insurance Company | A contractual savings institution that collects premiums and invests funds to cover future claims. |
| Interest Rate Spread | The difference between the interest a financial institution earns on loans and the interest it pays on deposits; a primary source of profit. |
| Investment Firm | A company that invests client capital in financial assets such as stocks, bonds, and funds (e.g., Vanguard, Fidelity). |
| Investment Bank | A financial intermediary that assists companies in issuing securities, underwriting IPOs, and facilitating mergers and acquisitions. |
| IPO (Initial Public Offering) | The first time a company offers its stock to the public, typically facilitated by investment banks. |
| Mutual Fund | A pool of funds from multiple investors used to invest in a diversified portfolio of stocks, bonds, or other securities. |
| Non-Depository Institution | A financial institution that does not accept deposits but offers financial services such as lending, investing, and trading. |
| Pension Fund | A financial institution that collects retirement contributions and invests them in long-term securities to provide income after retirement. |
| Private Equity Firm | An investment company that uses pooled capital from institutions or wealthy individuals to invest in private companies, often with the goal of restructuring or selling them for profit. |
| Securities Firm | A non-depository institution that helps companies issue securities and assists investors in trading them in financial markets. |
| Securities | Financial instruments that represent ownership (stocks), a creditor relationship (bonds), or rights to ownership (derivatives). |
| Syndicate | A group of investment banks that work together to underwrite and distribute new security issues, such as IPOs. |
| 7. Asset Management | The professional management of investments (e.g., stocks, bonds) to help individuals or institutions grow their wealth. |
| Banks | Depository institutions that offer financial services like accepting deposits, issuing loans, and providing checking/savings accounts. |
| Borrowers | Individuals or organizations that receive funds from a lender with the obligation to repay the amount with interest. |
| Central Bank | A national institution (e.g., the Federal Reserve) responsible for regulating the money supply, controlling interest rates, and stabilizing the economy. |
| Commercial Bank | A type of bank that provides services to individuals and businesses, including accepting deposits and making loans. |
| Credit Union | A member-owned financial institution that offers similar services to banks, typically with lower fees and better interest rates. |
| Deposits | Money placed in a financial institution (e.g., savings or checking accounts), which the institution may use to make loans. |
| Financial Institution | An organization that manages and moves money through services such as lending, investing, and accepting deposits. |
| Financial Stability | A condition in which the financial system operates efficiently and can withstand economic shocks. |
| Insurance Company | A contractual financial institution that collects premiums to protect policyholders from financial losses (e.g., health, life, auto insurance) and invests those funds to pay future claims. |
| Interest Rate | The cost of borrowing money or the return on savings, often set or influenced by central banks. |
| Investment Bank | A financial institution that facilitates complex financial transactions such as underwriting securities, mergers and acquisitions, and trading for large clients. |
| Investments | Assets like stocks, bonds, or real estate that are purchased with the expectation of generating a return. |
| Macroeconomic Institution | A financial institution that operates at the national level (e.g., a central bank) to influence the economy. |
| Mortgage Company | A specialized financial institution that issues loans for purchasing property. |
| Mutual Fund | A type of investment firm that pools money from multiple investors to buy a diversified portfolio of securities. |
| Pension Fund | A financial institution that manages retirement savings collected from employees and employers and invests them to provide income in retirement. |
| Premiums | Regular payments made to an insurance company in exchange for coverage. |
| Private Equity Firm | An investment company that uses capital from wealthy individuals or institutions to invest in private companies, often aiming to restructure and sell them for a profit or take them public. |
| Savers | Individuals or organizations that place money into financial institutions to earn interest or invest for future use. |
| Securities | Tradable financial instruments such as stocks or bonds. |
| Underwriting | A process by which investment banks evaluate and assume risk in the issuance of new securities, often as part of an IPO or bond offering. |
| 8. Coincident Indicator | An economic statistic that changes simultaneously with the economy and reflects the current state of economic activity (e.g., GDP, personal income). |
| Consumer Price Index (CPI) | A measure that tracks the average price of a "basket of goods and services" to monitor inflation or deflation. |
| Deflation | A general decrease in prices across an economy, usually measured through a falling CPI. |
| Economic Indicator | A statistic used to gauge the health and performance of the economy (e.g., inflation, unemployment, GDP). |
| Economic Trend | A general direction in which economic data or market conditions are moving over time. |
| Federal Reserve (Fed) | The central bank of the United States responsible for controlling interest rates, managing inflation, and supporting employment through monetary policy. |
| Financial Institution | An organization such as a bank, investment firm, or insurance company that manages money and influences economic indicators. |
| Gross Domestic Product (GDP) | The total monetary value of all finished goods and services produced within a country over a specific time period; used to measure economic performance. |
| Inflation | The rise in general price levels in an economy over time, often measured by the CPI. |
| Interest Rate | The cost of borrowing money, often set or influenced by a central bank like the Federal Reserve. |
| Inverted Yield Curve | A situation in which short-term bond interest rates are higher than long-term rates, often viewed as a signal of a future recession. |
| Lagging Indicator | A measure that changes after the economy has shifted, used to confirm trends (e.g., unemployment rate, CPI). |
| Leading Indicator | A data point that changes before the economy begins to move in a particular direction, used to forecast economic trends (e.g., yield curve, stock market return). |
| Market Volatility | The frequency and extent of price changes in financial markets, often increased by uncertainty or investor reaction to news and trends. |
| Personal Income | The total income received by individuals, used as a coincident indicator to reflect consumer spending potential. |
| Recession | A significant decline in economic activity, often identified by falling GDP and rising unemployment. |
| Stock Market Return | The gain or loss made on investments in the stock market; often used as a leading indicator of economic direction. |
| Unemployment Rate | The percentage of people in the labor force who are jobless, used as a lagging indicator of economic performance. |
| Yield Curve | A graph showing interest rates across bonds of different maturities, used as a leading indicator of future economic conditions. |
| 9.Ethical | Based on accepted standards of conduct established by society, organizations, or professional groups; considers the well-being of all stakeholders. |
| Ethics | A system of principles that define what is right and wrong according to a group or profession; shaped by culture, religion, industry standards, and social norms. |
| Illegal | Describes an action that violates established laws and may result in a government-issued penalty. |
| Legal | Refers to behavior or actions that conform to established laws and regulations set by authorities or governments. |
| Legality | The state or quality of being in accordance with the law; lawfulness. |
| Moral | Related to an individual’s personal beliefs about right and wrong, good and bad, often shaped by upbringing, religion, and personal values. |
| Morality | The internal framework of beliefs and values that guide an individual's decisions about what is just, fair, or right. |
| Stakeholders | Individuals or groups affected by decisions made in a business or ethical context, such as clients, employees, and the public. |
| 10. Accountability | The obligation to take responsibility for one's actions and decisions. |
| Conflict of Interest | A situation where an individual’s personal interest might contradict their professional duty. |
| Due Diligence | Reasonable steps taken by a person or organization to avoid harm when entering into an agreement. |
| Ethical Dilemma | A situation where none of the options available are ethically acceptable. |
| Ethically Sound | An action or decision that aligns with recognized ethical principles. |
| Ethics | Standards of conduct that distinguish between right and wrong, promoting trust and integrity. |
| Exaggerating Business Performance | Misrepresenting financial or operational results to appear more successful than reality. |
| Fairness | Impartial and just treatment without favoritism or discrimination. |
| High-Commission Products | Financial products that offer larger rewards to sellers, often at the expense of client interests. |
| Honesty | The quality of being truthful and transparent in actions and communication. |
| Legal Compliance | Following all applicable laws and regulations in conducting business. |
| Moral Responsibility | A personal obligation to act in ways that align with one's values and sense of right and wrong. |
| Public Trust | Confidence placed by the public in the reliability and integrity of individuals or organizations. |
| Shareholder Value | The financial worth delivered to shareholders based on company performance. |
| Subprime Loans | Loans offered to borrowers with weak credit histories, often carrying higher risk. |
| Sustainable Business Growth | Business expansion that is ethical, long-term, and considers environmental and social impacts. |
| Transparent Supply Chain | A clear and openly disclosed system for sourcing and producing goods and services. |
| Underreporting Cash Income | Failing to disclose the full amount of income earned, often for tax evasion or fraud. |
| 11. Agency Costs | Internal costs arising when managers’ interests diverge from shareholders’ goals. |
| Agency Problem | When a manager (agent) acts in their own interest rather than in the interest of shareholders (principals). |
| Bondholders | Lenders who expect fixed interest payments and eventual return of principal from the company. |
| Cancer Charity Scandal | A scandal in which leaders of cancer charities misused $187 million in donations for personal benefit. |
| Client Demands | Expectations from clients that may challenge ethical standards or professional integrity. |
| Dividend Limitations | Restrictions on a company’s ability to pay dividends to protect bondholder interests. |
| Ethical Conflict | A dilemma arising when it’s difficult to identify a clearly ethical course of action. |
| Evaluate the Ethics | Step in resolving a conflict involving assessing what is right, lawful, and fair. |
| Explore Alternatives | Considering different ethical and legal options to resolve a conflict. |
| Financial Advisor | A professional who helps clients make investment decisions, sometimes under company pressure. |
| Financial Managers | Executives responsible for making the company's major financial decisions. |
| ImClone | A biotechnology company involved in a major insider trading scandal. |
| Insider Trading | Illegal practice of trading based on non-public, material information. |
| Managers | Those who manage operations and decisions within an organization. |
| Martha Stewart | Businesswoman involved in insider trading related to ImClone; convicted of obstruction of justice. |
| Misreporting Financial Data | The act of altering or falsifying financial data to present a misleading picture. |
| Personal Relationships | Conflicts that arise from close personal ties impacting professional judgment. |
| Professional Duties | Duties held by professionals to act with integrity, honesty, and fairness. |
| Restrictive Covenants | Clauses that limit company actions to reduce financial risk for lenders. |
| Samuel Waksal | Former ImClone CEO convicted of insider trading for tipping off friends and family. |
| Self-Dealing | Conducting business for personal benefit at the expense of the company or shareholders. |
| Shareholders | Equity owners of a company who benefit from increased stock value and dividends. |
| Stakeholders | Individuals or groups affected by a business decision or action. |
| Stock Analyst | An analyst who provides investment recommendations, sometimes under employer influence. |
| Stock-Based Compensation | Form of pay linking compensation to company stock performance to align interests. |
| Strategic Conflict | A disagreement or competition over strategic direction or priorities. |
| Wells Fargo | A bank penalized for opening millions of fake accounts to meet performance goals. |
| Work vs. Personal Conflicts | Situations where personal life interferes with professional responsibilities. |
| WorldCom | Telecom company involved in accounting fraud, leading to one of the largest bankruptcies in U.S. history. |
| 12. Annual Percentage Rate (APR) | The annual rate charged for borrowing or earned through an investment, expressed as a percentage. |
| Compound Interest | Interest calculated on both the original principal and previously earned interest. |
| Cost of Capital | The cost a company incurs to raise funds, often through borrowing or issuing stock. |
| Discount Rate | The rate used in time value of money calculations to discount future cash flows. |
| Interest | The return required by a lender for the use of assets over a specific period of time. |
| Interest Rate | The percentage of the principal that a lender charges a borrower for the use of money. |
| Principal | The original amount of money borrowed or invested, excluding interest. |
| Required Rate of Return | The minimum return an investor expects to receive for providing capital, considering risk. |
| Simple Interest | Interest calculated only on the original amount of money (the principal). |
| 13. Cost of Capital | The cost a company incurs to raise funds through debt or equity, influenced by investors' required returns. |
| Expected Return | The anticipated return on an investment based on probability-weighted outcomes. |
| Inflation | The rate at which the average price level of goods and services increases over time, reducing money's value. |
| Opportunity Cost | The return lost by choosing one option over another equally viable alternative. |
| Required Rate of Return | The minimum return an investor expects for the risk involved in an investment. |
| Risk | The possibility that actual investment outcomes will differ from expected results. |
| 14. Adaptive Expectations | The belief that future expectations (like wage increases) are based on past inflation trends. |
| Built-In Inflation | A form of inflation caused by workers demanding higher wages, which leads to increased production costs and prices. |
| Demand-Pull Inflation | A situation where demand for goods and services exceeds supply, driving prices up. |
| Ford™ Assembly Line | A manufacturing innovation introduced by Henry Ford in 1913 that significantly reduced production time and costs. |
| Inflation | The rate at which the general price level of goods and services rises, reducing the purchasing power of money. |
| Inflation-Adjusted Price | A price that has been adjusted to reflect the effects of inflation over time. |
| Input Costs | The costs of materials, labor, and other inputs required to produce goods and services. |
| Nominal Price | The actual historical cost of an item without adjusting for inflation. |
| Purchasing Power | The value of money expressed in terms of the quantity of goods and services it can buy. |
| Regulations & Tariffs | Government-imposed costs (such as taxes or import duties) that can raise prices when passed on to consumers. |
| Supply and Demand | The economic model that explains price determination based on the relationship between supply and demand. |
| Technology™ Role in Inflation | The use of advancements to lower production costs, improve efficiency, and reduce inflationary pressures. |
| 15. Fisher Effect | An economic theory stating that the real interest rate is equal to the nominal interest rate minus the expected inflation rate. |
| Inflation | The rate at which the general price level of goods and services rises, reducing purchasing power. |
| Interest Rate | The total cost of borrowing or the return on investment, made up of the risk-free rate and risk premium. |
| Nominal Rate | The total return on an investment before adjusting for inflation; includes inflation. |
| Opportunity Cost | The potential gain lost when choosing one investment over another. |
| Real Rate | The return on an investment after accounting for inflation; reflects real purchasing power. |
| Required Return | The minimum return an investor expects for the risk of the investment. |
| Risk | The chance that actual returns will differ from expected returns, often requiring higher compensation. |
| Risk Premium | The extra return investors require to compensate for taking on higher risk. |
| Risk-Free Rate | The base rate of return on an investment with no risk, often represented by government securities like U.S. Treasury bonds. |
| 16. Annuity | A series of equal payments made at regular intervals. |
| Annuity Due | An annuity with payments made at the beginning of each period. |
| Cash Flow | The movement of money in or out over time. |
| Compounding | The process of calculating future value by applying interest over time. |
| =FV( ) | Excel function to calculate future value. |
| Future Value (FV) | The amount of money an investment made today will grow into at a specified interest rate over time. |
| =IRR( ) | Excel function to calculate internal rate of return. |
| Internal Rate of Return (IRR) | The interest rate that makes the net present value of future cash flows equal to zero. |
| Interest Rate | The percentage used to calculate growth (compounding) or discount (present value) of money over time. |
| =NPER( ) | Excel function to calculate the number of periods. |
| =NPV( ) | Excel function to calculate net present value. |
| Net Present Value (NPV) | The total value of a series of future cash flows discounted to present value. |
| nper | The number of periods (e.g., months, years) in Excel calculations. |
| =PMT( ) | Excel function to calculate the payment per period. |
| pmt | The periodic payment amount in an annuity or loan. |
| =PV( ) | Excel function to calculate present value. |
| Present Value (PV) | The current worth of a future sum of money, discounted at a specific interest rate. |
| pv (Excel) | Present value input in Excel TVM functions. |
| =RATE( ) | Excel function to calculate the interest rate. |
| rate | The interest rate per period used in Excel financial functions. |
| Opportunity Cost | The potential benefit lost when choosing one alternative over another, such as delaying the use of money. |
| Ordinary Annuity | An annuity with payments made at the end of each period. |
| Perpetuity | A type of annuity where equal payments continue indefinitely. |
| Risk | The possibility that future payments or investments may not occur as expected. |
| Time Value of Money (TVM) | The concept that money today is worth more than the same amount in the future due to inflation, risk, and opportunity cost. |
| type (Excel) | Indicates the payment timing: 0 = ordinary annuity; 1 = annuity due. |
| value1, [value2] | Cash flow values used in Excel’s NPV function. |
| values | Array of cash flows used in Excel’s IRR function. |
| 17.Cost of Capital | The required return necessary to make a capital budgeting project worthwhile, often used as the discount rate. |
| Discount Rate | The interest rate used to determine the present value of future cash flows. |
| Financing Decisions | Choices regarding how to raise capital (e.g., loans or equity) and at what cost, often evaluated using TVM. |
| Inflation | The general increase in prices over time that reduces the purchasing power of money. |
| Interest | The cost of borrowing money, or the return on investment over time, influenced by the length of time and rate applied. |
| Interest Rate | The percentage used to calculate the cost of borrowing or the return on investment over time. |
| Investment Decisions | Evaluations of potential future returns versus current costs to determine whether to proceed with a project or purchase. |
| Loan Term | The length of time over which a loan must be repaid; longer terms usually result in more total interest paid. |
| Monthly Payment | The fixed amount paid each month to repay a loan, which includes both principal and interest. |
| Mortgage | A loan used to purchase property, typically repaid over 15–30 years with interest. |
| Opportunity Cost | The potential benefits lost when one financial option is chosen over another. |
| Personal Finance | Financial decisions made by individuals, such as saving, investing, borrowing, and planning for retirement. |
| Present Value (PV) | The value today of a sum of money to be received in the future, adjusted using a discount rate. |
| Retirement Planning | The process of determining financial strategies to ensure sufficient income during retirement years. |
| Risk | The possibility that outcomes will differ from expectations, such as the risk of loss or lower returns. |
| Savings Plan | A strategy to accumulate money over time to meet future financial goals, often using TVM to determine required contributions. |
| Time Value of Money (TVM) | The financial principle that a dollar today is worth more than a dollar in the future due to inflation, risk, and opportunity cost. |
| Total Interest | The full amount of interest paid over the life of a loan. |
| 18.Annuity Due | Payments made at the beginning of each period; in Excel, set type = 1. |
| Cash Flow | Money moving in or out, used in financial modeling and functions like NPV and IRR. |
| Future Value (FV) | The amount an investment will grow to in the future. |
| =FV() | Excel function that calculates future value based on inputs like rate, number of periods, payment, and present value. |
| =IRR() | Excel function that calculates the internal rate of return for a series of cash flows. |
| Internal Rate of Return (IRR) | The discount rate that makes the net present value of future cash flows equal to zero. |
| =NPER() | Excel function that calculates the number of periods needed to reach a financial goal. |
| =NPV() | Excel function that calculates net present value for uneven cash flows. |
| Net Present Value (NPV) | The present value of a series of future cash flows minus the initial investment. |
| =PMT() | Excel function that calculates the payment for a loan or annuity based on constant payments and a constant interest rate. |
| Payment (PMT) | The fixed amount paid at each period in an annuity or loan. |
| =PV() | Excel function that calculates present value based on future value, rate, and payment structure. |
| Present Value (PV) | The current value of a future sum of money or series of cash flows, discounted at a specific rate. |
| =RATE() | Excel function that calculates the interest rate per period. |
| Rate (Interest Rate) | The percentage used to calculate interest or growth per period. |
| nper | The number of periods in a financial calculation (e.g., months or years). |
| pmt | The periodic payment amount in Excel financial functions. |
| pv (Excel input) | The present value input in Excel functions; use a negative sign for cash outflows. |
| fv (Excel input) | The future value input in Excel functions; use a positive sign for cash inflows. |
| type | Excel input for payment timing: 0 = end of period (ordinary annuity), 1 = beginning (annuity due). |
| Ordinary Annuity | Equal payments made at the end of each period; in Excel, set type = 0. |
| Perpetuity | A stream of equal payments that continues forever; calculated with the formula: PV = PMT ÷ rate. |
| Single Sum | A one-time payment or lump sum, often used to calculate PV or FV. |
| Uneven Cash Flows | A series of payments or receipts that vary in amount; used in NPV and IRR functions. |
| Annualized Return | Converts a return earned over a period into an annual figure for comparison across investments. |
| Capital Gain | The increase in value of an investment, calculated as the ending price minus the beginning price. |
| Cash Flow | Income received from an investment, such as dividends or interest. |
| Dividends | Periodic payments made to shareholders from a company’s profits. |
| Expected Return | A weighted average of possible returns, based on probabilities of different scenarios. |
| Holding Period Return (HPR) | The total return received from holding an asset over a period, including capital gains and dividends. |
| Inflation Rate | The rate at which prices for goods and services increase over time, reducing purchasing power. |
| Nominal Return | The raw return on an investment, not adjusted for inflation. |
| Percentage Return | A return expressed as a percent of the original investment, often used to compare performance. |
| Probability | The likelihood of an outcome, used in calculating expected return. |
| Real Return | The return after adjusting for inflation, reflecting actual gain in purchasing power. |
| Return | The gain or loss on an investment over a specific time, expressed in dollars or as a percentage. |
| Default Risk (Credit Risk) | The possibility that a borrower will not repay a loan or meet contractual debt obligations. |
| Diversifiable Risk (Firm-Specific Risk / Unsystematic Risk) | Risk that affects individual firms or industries and can be reduced through diversification. |
| Financial Risk | Risk arising from a firm's use of debt; higher debt levels increase the chance of financial distress or bankruptcy. |
| Firm-Specific Risk | Risk unique to a company or industry, such as strikes, lawsuits, or management errors; also called diversifiable risk. |
| Interest Rate Risk | The risk that changes in interest rates will negatively affect the value of an investment, particularly bonds. |
| Investment-Grade Bonds | Bonds rated BBB or higher, indicating lower default risk. |
| Junk Bonds (High-Yield Bonds) | Bonds rated BB or lower, carrying higher default risk but potentially higher returns. |
| Market Risk (Systematic Risk / Non-Diversifiable Risk) | Risk affecting the entire market or economy, such as inflation, recession, or political instability; cannot be eliminated by diversification. |
| Non-Diversifiable Risk | Another term for market or systematic risk; inherent to the entire market. |
| Price Risk | Risk that the price of an asset deviates from expected levels due to company-specific factors. |
| Risk (in finance) | The possibility that actual returns will differ from expected returns, reflecting uncertainty in outcomes. |
| Standard Deviation (SD) | A statistical measure of the dispersion or variability of returns; used to quantify risk. |
| Systematic Risk | Another term for market risk; refers to risk common to all investments in the market. |
| Unsystematic Risk | Another term for firm-specific risk; refers to risks that are unique to a single company or industry. |
| Diversification | A risk management strategy that involves investing in a variety of assets to reduce exposure to firm-specific risk; it does not eliminate market risk. |
| Firm-Specific Risk | The portion of total risk that is unique to a particular company or industry and can be mitigated through diversification. |
| Insurance | A financial product that allows individuals or companies to transfer risk to an insurer in exchange for a premium. |
| Premium | The amount paid to an insurance company in exchange for coverage against specified risks. |
| Risk Avoidance | A strategy of eliminating exposure to risk by choosing not to engage in activities that could lead to loss. |
| Risk Management | The process of identifying, assessing, and responding to risk using strategies like reduction, transfer, retention, avoidance, separation, and diversification. |
| Risk Reduction (Mitigation) | Taking preventive measures to lessen the probability or impact of a loss, such as warning signs or safety protocols. |
| Risk Retention | The decision to accept risk internally, often because the cost of transferring or avoiding the risk is higher than the potential loss. |
| Risk Separation | The strategy of spreading important assets or operations across different locations to reduce the impact of a localized loss or disaster. |
| Risk Transfer | Shifting the financial consequences of risk to a third party, typically through insurance. |
| Systematic Risk (Market Risk) | The portion of total risk that affects all investments and cannot be eliminated through diversification. |
| Capital Asset Pricing Model (CAPM) | A financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks. |
| Credit Rating | A measure of the creditworthiness of a borrower, such as a government or corporation; affects the interest rate investors demand. |
| Inflation (CPI) | The general increase in prices over time, measured by the Consumer Price Index (CPI); reduces the purchasing power of money. |
| Investment Horizon | The total length of time an investor expects to hold an investment before taking the money out. |
| Liquidity | The ease with which an asset can be converted into cash without significant loss in value. |
| Risk | In finance, the possibility that the actual return on an investment will differ from the expected return. |
| Risk-Return Trade-Off | The principle that potential return rises with an increase in risk. |
| Standard Deviation | A statistical measure of the dispersion or variability of returns; higher standard deviation indicates more risk. |
| Systematic Risk | Also known as market risk, it is the portion of total risk that cannot be eliminated through diversification and affects all firms to varying degrees. |
| Time Diversification | The principle that holding investments for longer periods tends to reduce the probability of loss, especially for risky assets like stocks. |
| Volatility | The degree of variation in the price of a financial instrument over time; typically associated with higher risk. |
| 23.Accounting Differences | Variations in accounting practices (e.g., depreciation methods, inventory valuation) that affect comparability between firms. |
| Benchmarking | The process of comparing a company’s financial ratios with those of similar firms or industry standards to evaluate performance. |
| Cross-Sectional Analysis | Comparing a company's ratios with those of competitors or the industry during the same period to evaluate relative performance. |
| Diagnosis | Using financial ratios to identify signs of strength or weakness in a company’s performance. |
| Efficiency | A financial health area measured by how well a company uses its assets to generate revenue. |
| Evaluation | The use of ratios to assess whether management is delivering value to shareholders. |
| Financial Ratios | Calculated metrics (e.g., profit margin, ROE) that provide insight into a company’s performance and financial condition. |
| Flexibility | The ability to create or adjust financial ratios as needed since they are not strictly governed by GAAP. |
| Focus | Using ratios to highlight areas that need further investigation; they raise questions but don’t provide all answers. |
| Liquidity | A measure of a company’s ability to meet short-term obligations. |
| Profitability | A measure of how effectively a company generates income relative to revenue, assets, or equity. |
| Progress Measurement | Comparing actual performance to internal goals to determine whether strategic targets are being met. |
| Ratio Analysis | The process of evaluating financial statements through calculated ratios to assess company performance and condition. |
| Solvency | A company’s ability to meet long-term obligations and continue operations into the future. |
| Standardization | Converting raw financial data into ratios to allow comparison across firms and time periods. |
| Timing Issues | Distortions in financial ratios caused by seasonality or mismatches between point-in-time and over-time financial measures. |
| Trend Analysis | Comparing a company’s current financial ratios with its own historical data to identify performance patterns. |
| 24 Activity Ratios (Efficiency Ratios) | Measure how effectively a company uses its assets to generate revenue or cash. Examples: Asset Turnover, Inventory Turnover, Receivables Turnover |
| ARPU (Average Revenue Per User) | A tech industry metric used to measure revenue generated per user; illustrates monetization efficiency. |
| Current Ratio | A liquidity ratio that compares current assets to current liabilities; indicates short-term financial health. Formula: Current Assets ÷ Current Liabilities |
| Debt Ratio | A leverage ratio that shows the proportion of a company's assets financed by debt. Formula: Total Debt ÷ Total Assets |
| Debt-to-Equity Ratio | A leverage ratio showing the balance between debt and equity in financing assets. Formula: Total Debt ÷ Total Equity |
| EBIT (Earnings Before Interest and Taxes) | Used in calculating interest coverage and evaluating operating performance. |
| Efficiency Ratios | See: Activity Ratios |
| Financial Ratios | Tools used to evaluate a company’s performance, categorized into liquidity, activity, leverage, profitability, and market ratios. |
| Interest Coverage Ratio | A leverage ratio that indicates how easily a company can pay interest on outstanding debt. Formula: EBIT ÷ Interest Expense |
| Inventory Turnover | An efficiency ratio that measures how many times inventory is sold and replaced over a period. Formula: Cost of Goods Sold ÷ Average Inventory |
| Leverage Ratios (Solvency Ratios) | Measure how a firm finances its operations and manages long-term obligations. |
| Liquidity | The ability of a firm to convert assets into cash quickly and without significant value loss. |
| Liquidity Ratios | Evaluate a firm’s ability to pay short-term obligations without needing outside funding. Examples: Current Ratio, Quick Ratio |
| Market Ratios | Help investors evaluate whether a stock is fairly priced. Example: Price-to-Earnings (P/E) Ratio |
| Net Profit Margin | A profitability ratio showing the percentage of revenue that becomes net income. Formula: Net Income ÷ Sales |
| P/E Ratio (Price-to-Earnings Ratio) | A market ratio showing how much investors are willing to pay per dollar of earnings. Formula: Market Price per Share ÷ Earnings per Share (EPS) |
| Profitability Ratios | Measure how efficiently a company generates profit from sales, assets, or equity. Examples: Net Profit Margin, ROA, ROE |
| Quick Ratio | A liquidity ratio that excludes inventory from assets to measure immediate short-term liquidity. Formula: (Current Assets – Inventory) ÷ Current Liabilities |
| Receivables Turnover | An efficiency ratio that measures how quickly a firm collects cash from credit sales. Formula: Net Credit Sales ÷ Average Accounts Receivable |
| Return on Assets (ROA) | A profitability ratio showing how efficiently assets generate profit. Formula: Net Income ÷ Total Assets |
| Return on Equity (ROE) | A profitability ratio that shows how effectively a firm uses shareholders’ equity to generate profit. Formula: Net Income ÷ Shareholders’ Equity |
| Accounts Receivable Turnover (AR Turnover) | Measures how many times a company collects its receivables in a year. Formula: Credit Sales ÷ Average Accounts Receivable |
| Activity Ratios | Assess how effectively a firm uses its assets to generate sales or cash. Examples: Inventory Turnover, AR Turnover, Total Asset Turnover |
| Average Collection Period (ACP) | Indicates the average number of days it takes to collect accounts receivable. Formula: 365 ÷ AR Turnover |
| Current Ratio | A liquidity ratio that measures a company’s ability to cover its short-term obligations with short-term assets. Formula: Current Assets ÷ Current Liabilities |
| Debt Ratio | A leverage ratio that shows the proportion of a firm’s assets financed through liabilities. Formula: Total Liabilities ÷ Total Assets |
| Debt-to-Equity Ratio | Measures the relative use of debt and equity in financing the firm’s assets. Formula: Total Liabilities ÷ Shareholders’ Equity |
| Fixed Asset Turnover (FAT) | Measures how efficiently a company uses its fixed assets to generate sales. Formula: Sales ÷ Net Fixed Assets |
| Gross Margin | Measures the percentage of revenue remaining after deducting the cost of goods sold. Formula: Gross Profit ÷ Sales |
| Leverage Ratios | Analyze a company’s capital structure and financial risk by evaluating debt levels. Examples: Debt Ratio, Debt-to-Equity, TIE |
| Liquidity Ratios | Evaluate a company's ability to meet short-term obligations. Examples: Current Ratio, Quick Ratio |
| Net Margin | Measures the percentage of revenue that becomes net profit. Formula: Net Income ÷ Sales |
| Operating Income Return on Investment (OIROI) | Shows return on assets from core operations (before interest and taxes). Formula: Operating Income ÷ Total Assets |
| Operating Margin | Measures operating profit as a percentage of sales. Formula: Operating Profit (EBIT) ÷ Sales |
| Quick Ratio (Acid-Test Ratio) | A stricter measure of liquidity that excludes inventory from current assets. Formula: (Current Assets − Inventory) ÷ Current Liabilities |
| Return on Assets (ROA) | Measures how efficiently a company uses its assets to generate net income. Formula: Net Income ÷ Total Assets |
| Return on Equity (ROE) | Indicates how effectively shareholder equity is used to generate net income. Formula: Net Income ÷ Shareholders' Equity |
| Times Interest Earned (TIE) Ratio | Measures how easily a company can pay its interest expense using operating income. Formula: EBIT ÷ Interest Expense |
| Total Asset Turnover (TAT) | Indicates how efficiently total assets are used to generate sales. Formula: Sales ÷ Total Assets |
| Asset Turnover (Efficiency) | Measures how efficiently a company uses its total assets to generate sales. Formula: Sales ÷ Total Assets Higher turnover = better efficiency |
| DuPont Framework | A method to analyze Return on Equity (ROE) by breaking it down into three components: Net Profit Margin × Asset Turnover × Equity Multiplier |
| Equity Multiplier (Leverage) | Measures the degree of financial leverage used by a company. Formula: Total Assets ÷ Shareholders’ Equity Higher multiplier = more debt financing |
| Leverage | Use of borrowed capital (debt) to increase potential returns. Amplifies ROE when ROA is positive Increases risk if ROA is negative |
| Net Profit Margin (Profitability) | Indicates how much profit a company makes for each dollar of sales. Formula: Net Income ÷ Sales Higher margin = higher profitability |
| Return on Assets (ROA) | Shows how effectively a company generates profit from its assets. Formula: Net Income ÷ Total Assets Often used in the alternate DuPont formula: ROE = ROA × Equity Multiplier |
| Return on Equity (ROE) | Measures how efficiently a company uses shareholder equity to generate net income. Formula: Net Income ÷ Shareholders' Equity DuPont Breakdown: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier |
| Asset Turnover | A measure of how efficiently a company uses its assets to generate sales. Higher turnover means better efficiency. |
| DuPont Framework | A method for analyzing Return on Equity (ROE) by breaking it down into three components: Net Profit Margin × Asset Turnover × Leverage Multiplier |
| Leverage Multiplier | Reflects how much of a company’s assets are financed by debt versus equity. Higher leverage can increase ROE but also raises financial risk. |
| Net Profit Margin | Percentage of revenue retained as profit after all expenses. Increasing net margin improves profitability. |
| Return on Equity (ROE) | Measures the return generated on shareholders’ equity. Influenced by profitability, efficiency, and leverage. |
| Risk Profile | The level of financial risk a company faces, often affected by its use of leverage. |
| Trade-offs | The balance between increasing ROE via leverage and the associated financial risk. |
| Budgeting | The process of creating a financial plan to manage income and expenses and achieve financial goals. |
| Cash Budget | A short-term financial forecast estimating cash inflows and outflows, usually covering one month to one year. |
| Corrective Action | Steps taken to address variances between actual financial results and budgeted figures to prevent bigger problems. |
| Financial Goals | Targets or objectives related to managing money, such as saving, investing, or reducing debt. |
| Forecasting | The act of predicting future financial outcomes based on past data and expected events. |
| Performance Evaluation | Using budget comparisons to assess how well managers, departments, or individuals meet financial targets. |
| Personal Budgeting Principles | Key guidelines to manage personal finances effectively, including knowing yourself, developing strategies, keeping records, and eliminating consumer debt. |
| Variance | The difference between actual financial results and budgeted amounts, used to identify areas needing attention. |
| Cash Budget | A financial plan estimating cash inflows and outflows over a specific period to manage liquidity. |
| Cash Disbursements | The forecasted cash outflows or expenses, such as rent, payroll, and utilities. |
| Cash Inflows (Cash Receipts) | All sources of incoming cash, including sales, loans, and investments. |
| Customized Budgeting | A budgeting method tailored to individual goals, values, and lifestyles. |
| Ending Cash Balance | The amount of cash available at the end of the budgeting period, calculated as Beginning Cash plus Net Cash Flow. |
| Fixed Expense | A regular payment of the same amount each period, e.g., monthly mortgage. |
| Net Cash Flow | The difference between cash inflows and cash outflows during a budget period. |
| Personal Budgeting Steps | A five-step process: set goals, track finances, develop a plan, implement, and adjust. |
| Specific and Measurable Goals | Clearly defined financial targets that guide effective budgeting decisions. |
| Variable Expense | An expense that can change each period, such as food or entertainment. |
| Beginning Cash Balance | The amount of cash available at the start of a budgeting period. |
| Borrowing and Repayment | Borrowing occurs when cash falls below the minimum required balance; repayment happens when there is surplus cash. |
| Cash Budget | A short-term financial plan that estimates cash inflows and outflows to manage liquidity. |
| Cash Disbursements | Payments for expenses such as inventory, wages, rent, taxes, utilities, and other operational costs. |
| Cash Receipts | Cash collected from sales or accounts receivable; may include collections over several months. |
| Ending Cash Balance | The cash remaining at the end of the budgeting period after accounting for inflows, outflows, borrowing, and repayment. |
| Fixed/Recurring Expenses | Regular, predictable expenses such as rent and car payments. |
| Minimum Cash Balance | The minimum amount of cash a business or individual aims to keep on hand to meet obligations. |
| Net Cash Flow | The difference between cash receipts and cash disbursements during a budgeting period. |
| Personal Budget Categories | Income, expenses (fixed, variable, unexpected), and net cash flow planning in personal finance. |
| Sales on Credit | Sales where payment is received after the sale date, affecting cash receipts timing. |
| Variable Expenses | Expenses that vary month to month, such as entertainment and dining out. |
| Budgeting Apps & Software | Digital tools like Mint, YNAB, Quicken, or QuickBooks that help automate expense tracking by syncing with bank accounts. |
| Envelope Method | A cash management system where money is divided into labeled envelopes for each spending category; spending stops when the envelope is empty. |
| Monitoring | The process of reviewing tracked cash inflows and outflows to compare actual spending against the budget and spot issues. |
| Revising | Adjusting a budget based on monitoring insights, such as cutting expenses or reallocating funds to stay aligned with financial goals. |
| Spreadsheet Method | Using spreadsheets to manually record daily expenses by category for detailed tracking and analysis. |
| Tracking | Regularly recording all cash inflows and outflows to understand actual spending and inform budgeting decisions. |
| Additional Funds Needed (AFN) | Another term for the extra funding a company requires to support growth beyond what is internally available. |
| Balance Sheet Forecast | A projection that builds on the profit forecast and sales growth, creating a pro forma balance sheet showing potential future changes in a company’s financial position. |
| Discretionary Financing Needed (DFN) | Also called External Financing Needed (EFN); the estimated amount of external funds a company will need to support growth. |
| External Financing Needed (EFN) | See Discretionary Financing Needed (DFN). |
| Forecast Accuracy | The reliability of a financial forecast, which depends on the quality of inputs and assumptions. |
| Financial Forecasting | The process of predicting a company’s future financial performance based on historical data and reasonable assumptions. |
| Forecasting Financing Needs | Estimating how much additional funding is necessary to support business growth. |
| Garbage In, Garbage Out (GIGO) | A principle that poor-quality inputs will result in poor-quality outputs in forecasting. |
| Key Assumptions | Fundamental premises made in financial forecasting, such as future sales levels, asset-sales relationships, and expected profitability. |
| Profit Forecast | A projection of future earnings calculated by subtracting estimated costs from projected sales. |
| Pro Forma Balance Sheet | A forecasted balance sheet created as part of the balance sheet forecast to show future financial positions. |
| 33. Accounts Payable | A spontaneous account that represents money owed by a business to its suppliers, which typically increases as sales grow. |
| Accounts Receivable | A spontaneous account representing money owed to the business by customers, which changes automatically with sales. |
| Bank Loans | A discretionary account representing borrowed funds that require management’s decision for repayment or new borrowing. |
| Bonds Payable | A discretionary account involving debt securities issued by the company, requiring active management decisions. |
| Cost of Goods Sold (COGS) | A cost that usually varies directly with sales and can increase proportionally as sales grow. |
| Discretionary Accounts | Accounts that do not automatically change with sales and require management decisions, such as loans and new equity issuance. |
| Financial Planning | The process of linking asset requirements and sales growth to predict cash needs, budget, and financing decisions. |
| Inventory | A spontaneous account consisting of raw materials and goods that changes in relation to sales volume. |
| New Equity Issuance | A discretionary financing option where a company raises capital by issuing new shares, decided by management. |
| Owner Wealth Maximization | The goal of financial managers to increase the value for shareholders through effective planning and decision-making. |
| Sales Growth | An increase in sales volume that affects asset requirements and working capital needs. |
| Spontaneous Accounts | Accounts that automatically vary in proportion to sales growth, including accounts receivable, inventory, accounts payable, and cash. |
| Working Capital | Funds required to support the day-to-day operations of a business, which increase as sales grow. |
| 34. Accounts Payable | A spontaneous account that increases automatically with sales, representing money owed to suppliers. |
| Accrued Expenses | Spontaneous liabilities that grow proportionally with sales, reflecting expenses incurred but not yet paid. |
| Balance Sheet | A financial statement showing assets, liabilities, and equity at a specific point in time, used in forecasting total financing needs. |
| Common Stock | Part of equity representing ownership shares issued by the company, generally a discretionary account. |
| Discretionary Accounts | Accounts not automatically tied to sales changes and decided by management, such as notes payable, long-term debt, and equity. |
| Discretionary Financing Needed (DFN) | The amount of external funding required to support sales growth, calculated as: DFN = Projected Total Assets − Projected Total Liabilities − Projected Equity |
| Fixed Assets | Long-term tangible assets like equipment or property that do not scale automatically with sales and may require special investment planning. |
| Net Margin | The percentage of sales that remains as net income after all expenses, used to project retained earnings. |
| Plowback Ratio | The portion of net income retained in the company for reinvestment (1 − payout ratio). |
| Payout Ratio | The proportion of net income paid out as dividends. |
| Percent of Sales Method | A forecasting approach that projects financial statement items as a percentage of forecasted sales to estimate financing needs. |
| Projected Retained Earnings (RE) | Estimated retained earnings based on past RE plus net income retained, calculated as: Projected RE = Old RE + (Projected Sales × Net Margin × Plowback Ratio) |
| Sales Forecast | An estimate of future sales revenue based on historical data and market trends. |
| Spontaneous Accounts | Accounts that automatically change in proportion to sales, such as cash, accounts receivable, inventory, and accounts payable. |
| Total Assets | The sum of current and fixed assets, representing resources owned by the company. |
| Total Liabilities and Equity | The sum of all obligations and owner’s equity; must equal total assets in the balance sheet. |
| 35. Asset Turnover | A measure of how efficiently a company uses its assets to generate sales; part of the expanded SGR formula. |
| Capacity Constraints | Limitations related to existing fixed assets or production capabilities that affect a firm’s ability to grow without additional financing. |
| Discretionary Financing Needed (DFN) | The external funding required when a firm’s projected growth exceeds internal financing capacity. |
| Dividend Payout Ratio | The proportion of net income paid out as dividends to shareholders; reducing this ratio increases retained earnings. |
| DuPont Formula | An expanded formula for calculating Return on Equity (ROE) as the product of net margin, asset turnover, and financial leverage. |
| Financial Leverage | The degree to which a company uses debt to finance assets; included in the DuPont formula for SGR. |
| Net Margin | The percentage of revenue left as profit after all expenses; increasing net margin reduces the need for external financing. |
| Plowback Ratio (Retention Ratio) | The portion of net income retained in the business for reinvestment (1 − dividend payout ratio). |
| Return on Equity (ROE) | Net income divided by shareholder’s equity; a key component in calculating sustainable growth rate. |
| Sales Growth | The rate at which a company’s sales increase over time; growth beyond SGR may lead to a higher DFN. |
| Sustainable Growth Rate (SGR) | The maximum growth rate a firm can achieve without issuing new equity while maintaining current financial ratios. Basic formula: SGR = ROE × (1 − dividend payout ratio) Expanded formula: SGR = Net Margin × Asset Turnover × Leverage × (1 − dividend payou |
| 36. Actual Sales | The current sales revenue of a firm, used as a baseline in sales capacity calculations. |
| Capacity Utilization Rate | The percentage of current fixed asset capacity being used by actual sales. |
| Fixed Assets | Long-term tangible assets such as factories and machinery that are necessary for production but do not scale proportionally with sales. |
| Lumpy Assets | Assets that must be purchased in whole units rather than fractional amounts, leading to large, discrete investments rather than smooth scaling. |
| Sales Capacity | The maximum sales volume a firm’s current fixed assets can support without requiring new investments, calculated as Actual Sales divided by Capacity Utilization Rate. |
| Sales Capacity formula | Sales Capacity= Capacity Utilization Rate/Actual Sales |
| 37. Cost of Capital | The required rate of return used to discount future cash flows in NPV analysis; reflects the project's risk and the firm's financing costs. |
| Decision Rule (NPV) | A guideline stating: If NPV > 0, accept the project (it adds value). If NPV < 0, reject the project (it destroys value). |
| Discount Rate | The interest rate used to bring future cash flows back to their present value; often equal to the cost of capital. |
| Net Present Value (NPV) | The total of all expected future cash inflows and outflows from a project, discounted to present value, minus the initial investment. |
| Present Value | The value today of a future amount of money, calculated by discounting future cash flows. |
| Time Value of Money | The principle that a dollar today is worth more than a dollar in the future due to its earning potential. |
| 38. Conventional Cash Flows | A project cash flow pattern where there is one initial outflow (investment) followed by a series of positive inflows. IRR works best with this pattern. |
| Cost of Capital | The required rate of return for a project, often used as the benchmark for evaluating investment decisions. Also known as the discount rate. |
| Decision Rule (IRR) | IRR > Cost of Capital → Accept the project IRR < Cost of Capital → Reject the project IRR = Cost of Capital → Indifferent |
| Internal Rate of Return (IRR) | The discount rate that makes the net present value (NPV) of a project equal to zero. It reflects the project’s expected return. |
| Mutually Exclusive Projects | Projects where accepting one means rejecting the others. IRR is not reliable for comparing these, as it may lead to conflicting conclusions with NPV. |
| Reinvestment Assumption | The assumption that future cash flows will be reinvested at the IRR, which is often unrealistic. This is a weakness of the IRR method. |
| Time Value of Money | The concept that money received today is worth more than the same amount received in the future, due to its earning potential. |
| Unconventional Cash Flows | Cash flows that change signs more than once (e.g., an inflow followed by an outflow, then another inflow). These can produce multiple IRRs, making the IRR method unreliable. |
| 39. Capital Constraint | A limit on the amount of money a firm can invest in new projects. Under capital constraints, PI helps prioritize projects that generate the most value per dollar invested. |
| Cost of Capital | The required rate of return a firm expects to earn on its investments. Used as the discount rate when calculating PI and NPV. Accurately estimating it is crucial. |
| Decision Rule (PI) | PI > 1 → Accept the project (adds value) PI < 1 → Reject the project (destroys value) PI = 1 → Indifferent (break-even) |
| Initial Investment / Outlay | The upfront cost required to start a project. This is the denominator in the PI formula. |
| Mutually Exclusive Projects | Projects where only one can be chosen. PI is not ideal for comparing these because it favors smaller, high-efficiency projects even if larger ones create more value. |
| Net Present Value (NPV) | The difference between the present value of future cash inflows and the initial investment. Measures the dollar value added by a project. |
| Present Value of Future Cash Flows | The sum of a project’s expected future cash inflows, discounted to today’s dollars using the cost of capital. |
| Profitability Index (PI) | A capital budgeting ratio that compares the present value of future cash inflows to the initial investment: PI = Present Value of Future Cash Flows ÷ Initial Investment |
| Ranking Projects | The use of PI to prioritize projects under capital constraints by selecting those that deliver the highest return per unit of investment. |
| Time Value of Money | The concept that a dollar today is worth more than a dollar in the future due to its earning potential. Both PI and NPV incorporate this principle. |
| 40. Bond | A debt instrument where a company borrows money from investors and promises to repay with interest over time. |
| Callable Bond | A bond that allows the issuer to repay the debt before the maturity date. |
| Capital Investment | Money spent by a company on long-term assets (e.g., buildings, equipment) to support growth and increase shareholder value. |
| Common Stock | Represents ownership in a firm with voting rights and variable dividends. Last in line during liquidation. |
| Convertible Bond | A bond that can be converted into a predetermined number of equity shares (stock). |
| Coupon Payment | The periodic interest payment made to bondholders, typically semiannual. |
| Coupon Rate | The fixed annual interest rate a bond pays, based on the bond’s par value. |
| Debt Financing | Raising capital by borrowing money, often through the issuance of bonds. |
| Discount Bond | A bond sold below its par value, often when market interest rates are higher than the bond’s coupon rate. |
| Face Value (Par Value) | The amount a bond issuer agrees to repay at maturity; usually $1,000 for corporate bonds. |
| Fixed-Income Security | An investment, like a bond, that pays a fixed rate of return over time. |
| Liquidation Order | The sequence in which stakeholders are paid if a firm is dissolved: Creditors/Debt Holders Preferred Stockholders Common Stockholders |
| Maturity (Bond) | The date when a bond's principal is repaid to the investor. |
| Net Present Value (NPV) | The difference between the present value of future cash flows and the initial investment. A positive NPV means value is added. |
| Preferred Stock | A hybrid security with fixed dividends and priority over common stock in asset claims, but no voting rights. |
| Profitability Index (PI) | A ratio of present value of future cash flows to initial investment. Used to evaluate the return per dollar invested. |
| Residual Claim | The right of common shareholders to receive company profits or assets after all debts and other obligations are paid. |
| Salvage Value | The estimated resale value of a long-term asset at the end of its useful life. |
| Stock | Represents ownership in a corporation. Includes common and preferred types. |
| Stockholder (Shareholder) | An individual or entity that owns stock in a company and has rights such as voting and profit-sharing. |
| Time Value of Money | The concept that a dollar today is worth more than a dollar in the future, due to its earning potential. |
| Voting Rights | The right of common shareholders to vote on corporate matters like electing the board of directors. |
| Yield to Maturity (YTM) | The total expected return on a bond if held until maturity, factoring in current price, par value, and interest payments. |
| Zero-Coupon Bond | A bond that is sold at a discount and does not make periodic interest payments. The return comes from the difference between purchase price and face value. |
| 41. Beta (β) | A measure of a stock's volatility relative to the market. A beta of 1 means the stock moves with the market; greater than 1 means more volatile. |
| Bond | A debt instrument where the issuer borrows funds and repays them with interest over a fixed period. |
| Bond Valuation | The process of calculating a bond’s fair value by discounting future coupon payments and the face value at maturity using the required rate of return (YTM). |
| Capital Asset Pricing Model (CAPM) | A formula used to determine the required rate of return on a stock, based on its risk relative to the market. Formula: Ri = Rf + β(Rm − Rf) |
| Capital Budgeting | The process of evaluating and planning long-term investments such as new equipment, buildings, or projects. |
| Common Stock | Equity ownership in a firm, often with voting rights and variable dividends. Last in liquidation order. |
| Coupon Rate | The fixed annual interest rate paid on a bond, based on its par value. |
| Dividend | A portion of company earnings paid to shareholders. Fixed for preferred stock; variable for common stock. |
| Face Value (Par Value) | The bond’s stated value, repaid to the investor at maturity (usually $1,000). |
| Gordon Growth Model | A formula for valuing common stock assuming dividends grow at a constant rate: Vcs = D1 / (kcs − g) |
| Intrinsic Value | The present value of expected future cash flows from an asset. Used to determine if a stock is under- or overvalued. |
| Internal Rate of Return (IRR) | The discount rate that makes a project’s NPV equal to zero. Accept the project if IRR > required return. |
| Market Price | The current trading price of an asset in the market. |
| Net Present Value (NPV) | The value added by a project: |
| NPV = Present Value of Inflows − Initial Investment | Accept if NPV > 0. |
| Perpetuity Model | Used for valuing preferred stock with constant dividends: Value = Annual Dividend / Required Return |
| Preferred Stock | A hybrid security with fixed dividends and priority over common stock in asset claims, but typically no voting rights. |
| Present Value (PV) | The current worth of a future sum of money, discounted using a specific rate. |
| Profitability Index (PI) | The ratio of present value of future cash inflows to the initial investment: PI = PV of Inflows / Initial Investment Accept if PI > 1. |
| Required Rate of Return | The minimum return investors expect for an investment, used as the discount rate in NPV calculations. |
| Risk-Free Rate (Rf) | The return on an investment with zero risk, typically government bonds like U.S. Treasuries. |
| Stock Valuation | The process of estimating a stock’s value using methods like the Gordon Growth Model or dividend discount models. |
| Time Value of Money | The principle that money today is worth more than the same amount in the future due to its potential earning capacity. |
| Yield to Maturity (YTM) | The total return expected if a bond is held until maturity, factoring in price, par value, coupon payments, and time. |
| 42. Capital Budgeting | The process of evaluating and selecting long-term investments that are in line with a company’s goal to maximize shareholder value. |
| Capital Constraint | A limit on the amount of capital available for investment. Under this constraint, firms must prioritize projects that deliver the most value per dollar spent. |
| Cost of Capital | The required rate of return a firm must earn on its investment projects to maintain its market value and attract funds. |
| IRR (Internal Rate of Return) | The discount rate that makes the Net Present Value (NPV) of a project equal to zero. Useful for comparing returns, but not always reliable with irregular cash flows or mutually exclusive projects. |
| Mutually Exclusive Projects | Projects where choosing one means rejecting the others. NPV is the most reliable tool when evaluating such options. |
| Net Present Value (NPV) | The sum of present values of all cash inflows and outflows of a project. A positive NPV indicates the project will add value to the firm. |
| PI (Profitability Index) | A ratio that compares the present value of future cash flows to the initial investment. It shows how much value is created per dollar invested. Formula: PI = Present Value of Future Cash Flows / Initial Investment |
| Relevant Cash Flows | All expected inflows and outflows that will result directly from a project. These must be included to make an accurate investment decision. |
| Risk Adjustment | Incorporating risk into project evaluation by using a higher discount rate for riskier projects (often via the cost of capital). |
| Time Value of Money | The principle that money today is worth more than the same amount in the future, due to its earning potential. |
| 43. Capital Budgeting | The process of planning and managing a firm’s long-term investments by evaluating potential projects or expenditures. |
| Cash Flow | Money being transferred into or out of a project. In capital budgeting, both inflows (returns) and outflows (costs) are forecasted over time. |
| Discount Rate | The rate used to convert future cash flows into present value. Reflects opportunity cost, risk, and the time value of money. |
| Net Present Value (NPV) | The sum of present values of all expected cash inflows and outflows. A project is considered worthwhile if its NPV is positive. |
| Opportunity Cost | The value of the next best alternative that is forgone when choosing one investment over another. |
| Present Value (PV) | The current worth of a future sum of money or stream of cash flows, given a specified discount rate. |
| Time Value of Money (TVM) | The concept that money available now is worth more than the same amount in the future due to its potential earning capacity. |
| 44. Capital Budgeting | The process of evaluating and selecting long-term investments that align with a firm’s goal of value creation. |
| Capital Structure | The mix of debt and equity a firm uses to finance its operations and growth. It affects the overall cost of capital. |
| Cost of Capital | The minimum return a project must earn to satisfy investors. It serves as the benchmark for accepting or rejecting investments. |
| Debt Financing | Raising capital by borrowing (e.g., issuing bonds or taking loans). Debt is less risky for investors than equity and typically comes with lower required returns. |
| Discount Rate | The interest rate used to convert future cash flows into present value. For investment decisions, it equals the project’s cost of capital. |
| Equity Financing | Raising capital by issuing stock. It carries more risk for investors because shareholders are paid after debt holders. |
| Financial Risk | The additional risk to shareholders caused by the firm’s use of debt. More debt increases the firm’s obligations and potential volatility. |
| Opportunity Cost | The return investors forego by choosing one investment over another. This is embedded in the cost of capital. |
| Preferred Stock | A type of equity with fixed dividends and priority over common stock in case of liquidation, but typically no voting rights. |
| Project-Specific Risk | Risk that varies by project depending on factors like location, industry, or competition. Higher risk → higher required return. |
| Required Rate of Return | The minimum return investors demand based on the project’s risk. It is used as the discount rate in capital budgeting. |
| Tax Shield | The tax savings a firm gains from interest payments on debt, which are deductible from taxable income. This reduces the effective cost of debt. |
| 45. Cannibalization | The reduction in sales of a firm’s existing products due to the introduction of a new product. This lost revenue is considered an incidental cost and must be included in capital investment analysis. |
| Incremental Cash Flows | Cash inflows and outflows that occur only if a project is accepted. These include new revenues, new operating expenses, and tax impacts directly resulting from the project. |
| Incidental Cash Flows | Indirect or secondary cash flows generated as a side effect of a project. These may include related product sales or reduced sales of existing products due to cannibalization. These should be included in the analysis. |
| Opportunity Costs | The value of the next best alternative that is given up when resources are committed to a project. Always included in project evaluation because they represent real economic trade-offs. |
| Overhead Costs (Allocated Overhead) | General business expenses not directly tied to a specific project (e.g., executive salaries, office rent). These are typically excluded unless they change because of the project. |
| Sunk Costs | Past expenditures that cannot be recovered and should not be considered in current investment decisions. These are irrelevant to future outcomes. |
| 46. |
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