| acquisition | Takeover of a firm by purchase of that firm's common stock or assets.
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| additional paid-in capital | Difference between issue price and par value of stock. Also called capital surplus.
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| agency problems | Managers, acting as agents for stockholders, may act in their own interests rather than maximizing value.
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| aging schedule | Classification of accounts receivable by time outstanding.
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| annual percentage rate (APR) | Interest rate that is annualized using simple interest.
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| annuity | Equally spaced level stream of cash flows with a finite maturity.
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| annuity due | Level stream of cash flows starting immediately.
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| annuity factor | Present value of an annuity of $1 per period.
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| authorized share capital | Maximum number of shares that the company is permitted to issue.
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| average tax rate | Total taxes owed divided by total income.
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| balance sheet | Financial statement that shows the value of the firm's assets and liabilities at a particular time.
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| balancing item | Variable that adjusts to maintain the consistency of a financial plan. Also called plug.
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| bankruptcy | The reorganization or liquidation of a firm that cannot pay its debts.
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| beta | Sensitivity of a stock's return to the return on the market portfolio.
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| bond | Security that obligates the issuer to make specified payments to the bondholder.
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| book rate of return | Accounting income divided by book value. Also called accounting rate of return.
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| book value | Net worth of the firm according to the balance sheet.
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| break-even analysis | Analysis of the level of sales at which the project breaks even.
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| call option | Right to buy an asset at a specified exercise price on or before the exercise date.
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| callable bond | Bond that may be repurchased by the firm before maturity at a specified call price.
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| capital asset pricing model (CAPM) | Theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium.
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| capital budget | List of planned investment projects.
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| capital budgeting decision | Decision as to which real assets the firm should acquire.
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| capital markets | Markets for long-term financing.
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| carrying costs | Costs of maintaining current assets, including opportunity cost of capital.
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| cash conversion cycle | Period between firm's payment for materials and collection on its sales.
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| cash dividend | Payment of cash by the firm to its shareholders.
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| CEO | Acronym for "chief executive officer."
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| CFO | See chief financial officer.
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| chief financial officer (CFO) | Oversees the treasurer and controller and sets overall financial strategy.
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| collection policy | Procedures to collect and monitor receivables.
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| commercial paper | Short-term unsecured notes issued by firms.
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| common-size balance sheet | Balance sheet that presents items as a percentage of total assets.
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| common-size income statement | Income statement that presents items as a percentage of revenues.
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| common stock | Ownership shares in a publicly held corporation.
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| company cost of capital | Expected rate of return demanded by investors in a company; determined by the average risk of the company's securities.
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| compound interest | Interest earned on interest.
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| concentration banking | System whereby customers make payments to a regional collection center that transfers funds to a principal bank.
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| constant-growth dividend discount model | Version of the dividend discount model in which dividends grow at a constant rate.
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| consumer credit | Bills awaiting payment from final customers to a company.
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| controller | Officer responsible for budgeting, accounting, and taxes.
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| convertible bond | Bond that the holder may exchange for a specified amount of another security.
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| corporation | Business organized as a separate legal entity owned by stockholders.
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| cost of capital | Minimum acceptable rate of return on capital investment.
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| costs of financial distress | Costs arising from bankruptcy or distorted business decisions before bankruptcy.
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| coupon | The interest payments paid to the bondholder.
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| coupon rate | Annual interest payment as a percentage of face value.
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| credit analysis | Procedure to determine the likelihood that a customer will pay its bills.
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| credit policy | Standards set to determine the amount and nature of credit to extend to customers.
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| cumulative voting | Voting system in which all the votes one shareholder is allowed to cast can be cast for one candidate for the board of directors.
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| current yield | Annual coupon payments divided by bond price.
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| decision tree | Diagram of sequential decisions and possible outcomes.
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| default premium | Difference in promised yields between a default-free bond and a riskier bond.
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| default risk | The risk that a bond issuer may default on its bonds. Also called credit risk.
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| degree of operating leverage (DOL) | Percentage change in profits given a 1 percent change in sales.
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| depreciation tax shield | Reduction in taxes attributable to depreciation.
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| discount factor | Present value of a $1 future payment.
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| discount rate | Interest rate used to compute present values of future cash flows.
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| diversification | Strategy designed to reduce risk by spreading the portfolio across many investments.
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| dividend | Periodic cash distribution from the firm to its shareholders.
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| dividend discount model | Discounted cash-flow model which states that today's stock price equals the present value of all expected future dividends.
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| dividend-payout ratio | Percentage of earnings paid out as dividends.
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| Dow Jones Industrial Average | Index of the investment performance of a portfolio of 30 "blue-chip" stocks.
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| Du Pont system | A breakdown of ROE and ROA into component ratios.
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| economic break-even point | Minimum level of sales needed to cover all costs including the cost of capital.
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| economic value added (EVA) | Term used by the consulting firm Stern Stewart for income measured after deduction of the cost of the capital employed.
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| effective annual interest rate | Interest rate that is annualized using compound interest.
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| efficient markets | Markets in which security prices reflect all available information.
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| equivalent annual annuity | The cash flow per period with the same present value as the cost of buying and operating a machine.
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| eurobond | Bond that is marketed internationally.
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| eurodollars | Dollars held on deposit in a bank outside the United States.
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| EVA | See economic value added.
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| exchange rate | Amount of one currency needed to purchase one unit of another.
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| ex-dividend | Without the dividend. Buyer of a stock after the ex-dividend date does not receive the most recently declared dividend.
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| expectations theory of exchange rates | Theory that the expected spot exchange rate equals the forward rate.
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| face value | Payment at the maturity of the bond. Also called par value or maturity value.
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| financial assets | Claims to the income generated by real assets. Also called securities.
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| financial deficit | Difference between the cash companies need and the amount generated internally.
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| financial institution | A bank, insurance company, or similar financial intermediary.
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| financial intermediary | An organization that raises money from many investors and provides financing to individuals, corporations, or other organizations.
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| financial leverage | Debt financing amplifies the effects of changes in operating income on the returns to stockholders.
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| financial markets | Markets in which securities are issued and traded.
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| financial risk | Risk to shareholders resulting from the use of debt.
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| financial slack | Ready access to cash or debt financing.
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| financing decision | Decision as to how to raise the money to pay for investments in real assets.
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| fixed costs | Costs that do not depend on the level of output.
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| fixed-income market | Market for debt securities.
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| floating-rate security | Security paying dividends or interest that varies with short-term interest rates.
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| flotation costs | The cost incurred when a firm issues new securities to the public.
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| forex | Abbreviation for "foreign exchange"; also abbreviated fx.
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| forward contract | Agreement to buy or sell an asset in the future at an agreed price.
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| forward rate of exchange | Exchange rate agreed today for a future transaction.
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| fundamental analysts | Analysts who attempt to find mispriced securities by analyzing fundamental information, such as earnings, asset values, and business prospects.
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| funded debt | Debt with more than 1 year remaining to maturity.
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| future value | Amount to which an investment will grow after earning interest.
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| futures contract | Exchange-traded promise to buy or sell an asset in the future at a prespecified price.
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| fx | Abbreviation for "foreign exchange"; also abbreviated forex.
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| GAAP | See generally accepted accounting principles.
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| general cash offer | Sale of securities open to all investors by an already-public company.
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| generally accepted accounting principles (GAAP) | Procedures for preparing financial statements.
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| income statement | Financial statement that shows the revenues, expenses, and net income of a firm over a period of time.
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| inflation | Rate at which prices as a whole are increasing.
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| information content of dividends | Dividend increases send good news about future cash flow and earnings. Dividend cuts send bad news.
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| initial public offering (IPO) | First offering of stock to the general public.
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| interest rate parity | Theory that forward premium equals interest rate differential.
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| interest tax shield | Tax savings resulting from deductibility of interest payments.
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| internal growth rate | Maximum rate of growth without external financing.
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| internal rate of return (IRR) | Discount rate at which project NPV = 0.
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| internally generated funds | Cash reinvested in the firm; depreciation plus earnings not paid out as dividends.
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| international Fisher effect | Theory that real interest rates in all countries should be equal, with differences in nominal rates reflecting differences in expected inflation.
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| investment grade | Bonds rated Baa or above by Moody's or BBB or above by Standard & Poor's.
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| IPO | See initial public offering.
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| IRR | See internal rate of return.
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| issued shares | Shares that have been issued by the company.
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| junk bond | Bond with a rating below Baa or BBB.
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| Just in time | System of inventory management that requires minimum inventories of materials and very frequent deliveries by suppliers.
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| law of one price | Theory that prices of goods in all countries should be equal when translated to a common currency.
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| lease | Long-term rental agreement.
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| leveraged buyout (LBO) | Acquisition of a firm by a private group using substantial borrowed funds.
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| limited liability | The owners of the corporation are not personally responsible for its obligations.
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| line of credit | Agreement by a bank that a company may borrow at any time up to an established limit.
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| liquidation | Sale of a bankrupt firm's assets.
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| liquidation value | Net proceeds that would be realized by selling the firm's assets and paying off its creditors.
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| liquidity | Ability to sell an asset for cash at short notice.
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| lock-box system | System whereby customers send payments to a post office box and a local bank collects and processes the checks.
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| majority voting | Voting system in which each director is voted on separately.
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| management buyout (MBO) | Acquisition of the firm by its own management in a leveraged buyout.
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| M&A | Abbreviation for "mergers and acquisitions."
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| marginal tax rate | Additional taxes owed per dollar of additional income.
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| market index | Measure of the investment performance of the overall market.
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| market portfolio | Portfolio of all assets in the economy. In practice a broad stock market index is used to represent the market.
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| market risk | Economy-wide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.
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| market risk premium | Risk premium of market portfolio. Difference between market return and return on risk-free Treasury bills.
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| market value added | The difference between the market value of a firm's equity and its book value.
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| market-value balance sheet | Financial statement that uses the market value of all assets and liabilities.
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| maturity premium | Extra average return from investing in long-versus short-term Treasury securities.
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| merger | Combination of two firms into one, with the acquirer assuming assets and liabilities of the target firm.
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| MM dividend-irrelevance proposition | Theory that under ideal conditions the value of the firm is unaffected by dividend policy.
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| MM's proposition I (debt irrelevance proposition) | The value of a firm is unaffected by its capital structure.
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| MM's proposition II | The required rate of return on equity increases as the firm's debt-equity ratio increases.
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| Modified Accelerated Cost Recovery System (MACRS) | Depreciation method that allows higher tax deductions in early years and lower deductions later.
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| money market | Market for short-term financing (less than 1 year).
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| mutual fund | Pools the savings of many investors and invests in a portfolio of securities.
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| mutually exclusive projects | Two or more projects that cannot be pursued simultaneously.
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| net present value (NPV) | Present value of cash flows minus investment.
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| net working capital | Current assets minus current liabilities.
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| net worth | Book value of common stockholders' equity plus preferred stock.
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| nominal interest rate | Rate at which money invested grows.
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| NPV | See net present value.
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| NYSE | New York Stock Exchange.
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| open account | Agreement whereby sales are made with no formal debt contract.
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| operating leverage | Degree to which costs are fixed.
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| operating risk (business risk) | Risk in firm's operating income.
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| opportunity cost | Benefit or cash flow forgone as a result of an action.
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| opportunity cost of capital | Expected rate of return given up by investing in a project.
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| outstanding shares | Shares that have been issued by the company and are held by investors.
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| par value | Value of security shown in company's accounts.
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| payback period | Time until cash flows recover the initial investment in the project.
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| payout ratio | Fraction of earnings paid out as dividends.
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| P/E | See price-earnings multiple.
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| pecking order theory | Firms prefer to issue debt rather than equity if internal finance is insufficient.
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| pension fund | Investment plan set up by an employer to provide for employees' retirement.
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| percentage of sales model | Planning model in which sales forecasts are the driving variables and most other variables are proportional to sales.
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| perpetuity | Stream of level cash payments that never ends.
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| planning horizon | Time horizon for a financial plan.
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| plowback ratio | Fraction of earnings retained by the firm.
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| poison pill | Measure taken by a target firm to avoid acquisition; e.g., the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.
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| preferred stock | Stock that takes priority over common stock in regard to dividends.
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| present value (PV) | Value today of a future cash flow.
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| present value of growth opportunities (PVGO) | Net present value of a firm's future investments.
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| price-earnings (P/E) multiple | Ratio of stock price to earnings per share.
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| primary market | Market for the sale of new securities by corporations.
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| prime rate | Benchmark interest rate charged by banks.
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| private placement | Sale of securities to a limited number of investors without a public offering.
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| pro formas | Projected or forecasted financial statements.
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| profitability index | Ratio of net present value to initial investment.
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| project cost of capital | Minimum acceptable expected rate of return on a project given its risk.
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| prospectus | Formal summary that provides information on an issue of securities.
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| protective covenant | Restriction on a firm to protect bondholders.
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| proxy contest | Takeover attempt in which outsiders compete with management for shareholders' votes. Also called proxy fight.
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| purchasing power parity (PPP) | Theory that the cost of living in different countries is equal and that exchange rates adjust to offset inflation differentials across countries.
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| put option | Right to sell an asset at a specified exercise price on or before the exercise date.
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| PV | See present value.
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| random walk | Security prices change randomly, with no predictable trends or patterns.
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| rate of return | Total income per period per dollar invested.
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| real assets | Assets used to produce goods and services.
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| real interest rate | Rate at which the purchasing power of an investment increases.
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| real options | Options to invest in, modify, or dispose of a capital investment project.
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| real value of $1 | Purchasing power–adjusted value of a dollar.
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| reorganization | Restructuring of financial claims on failing firm to allow it to keep operating.
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| residual income | Profit minus cost of capital employed. Also called economic value added (EVA).
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| restructuring | Process of changing the firm's capital structure without changing its assets.
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| retained earnings | Earnings not paid out as dividends.
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| rights issue | Issue of securities offered only to current stockholders.
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| risk premium | Expected return in excess of risk-free return as compensation for risk.
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| S&P | Abbreviation for "Standard & Poor's stock market index."
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| scenario analysis | Project analysis given a particular combination of assumptions.
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| seasoned offering | Sale of securities by a firm that is already publicly traded.
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| secondary market | Market in which previously issued securities are traded among investors.
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| secured debt | Debt that has first claim on specified collateral in the event of default.
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| security market line | Relationship between expected return and beta.
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| sensitivity analysis | Analysis of the effects on project profitability of changes in sales, costs, and so on.
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| shark repellent | Amendments to a company charter made to forestall takeover attempts.
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| shelf registration | A procedure that allows firms to file one registration statement for several issues of the same security.
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| shortage costs | Costs incurred from shortages in current assets.
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| simple interest | Interest earned only on the original investment; no interest is earned on interest.
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| simulation analysis | Estimation of the probabilities of different possible outcomes, e.g., from an investment project.
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| sinking fund | Fund established to retire debt before maturity.
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| spot rate of exchange | Exchange rate for an immediate transaction.
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| spread | Difference between public offer price and price paid by underwriter.
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| stakeholder | Anyone with a financial interest in the firm.
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| Standard & Poor's Composite Index | Index of the investment performance of a portfolio of 500 large stocks. Also called S&P 500.
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| standard deviation | Square root of variance. Another measure of volatility.
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| statement of cash flows | Financial statement that shows the firm's cash receipts and cash payments over a period of time.
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| stock dividend | Distribution of additional shares to a firm's stockholders.
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| stock repurchase | Firm buys back stock from its shareholders.
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| stock split | Issue of additional shares to firm's stockholders.
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| straight-line depreciation | Constant depreciation for each year of the asset's accounting life.
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| subordinated debt | Debt that may be repaid in bankruptcy only after senior debt is paid.
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| sunk costs | Costs that have been incurred and cannot be recovered.
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| sustainable growth rate | Steady rate at which a firm can grow; return on equity × plowback ratio.
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| swap | Arrangement by two counterparties to exchange one stream of cash flows for another.
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| technical analysts | Investors who attempt to identify over- or undervalued stocks by searching for patterns in past prices.
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| tender offer | Takeover attempt in which outsiders directly offer to buy the stock of the firm's shareholders.
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| terms of sale | Credit, discount, and payment terms offered on a sale.
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| trade credit | Bills awaiting payment from one company to another.
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| trade-off theory | Debt levels are chosen to balance interest tax shields against the costs of financial distress.
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| treasurer | Manager responsible for financing, cash management, and relationships with banks and other financial institutions.
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| treasury stock | Stock that has been repurchased by the company and held in its treasury.
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| underpricing | Issuing securities at an offering price set below the true value of the security.
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| underwriter | Firm that buys an issue of securities from a company and resells it to the public.
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| unique risk | Risk factors affecting only that firm. Also called diversifiable risk.
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| variable costs | Costs that change as the level of output changes.
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| variance | Average value of squared deviations from mean. A measure of volatility.
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| venture capital | Money invested to finance a new firm.
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| WACC | See weighted-average cost of capital.
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| warrant | Right to buy shares from a company at a stipulated price before a set date.
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| weighted-average cost of capital (WACC) | Expected rate of return on a portfolio of all the firm's securities, adjusted for tax savings due to interest payments.
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| workout | Agreement between a company and its creditors establishing the steps the company must take to avoid bankruptcy.
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| yield curve | Graph of the relationship between time to maturity and yield to maturity.
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| yield to maturity | Interest rate for which the present value of the bond's payments equals the price.
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