| absolute priority rule (APR) | The rule establishing priority of claims in liquidation.
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| accelerated cost recovery system (ACRS) | A depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.
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| accounting break-even | The sales level that results in zero project net income.
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| accounts payable period | The time between receipt of inventory and payment for it.
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| accounts receivable financing | A secured short-term loan that involves either the assignment or the factoring of receivables.
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| accounts receivable period | The time between sale of inventory and collection of the receivable.
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| agency problem | The possibility of conflict of interest between the stockholders and management of a firm.
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| aggregation | The process by which smaller investment proposals of each of a firm's operational units are added up and treated as one big project.
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| aging schedule | A compilation of accounts receivable by the age of each account.
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| American Depositary Receipt (ADR) | A security issued in the United States representing shares of a foreign stock and allowing that stock to be traded in the United States.
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| American option | An option that may be exercised at any time until its expiration date.
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| annual percentage rate (APR) | The interest rate charged per period multiplied by the number of periods per year.
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| annuity due | An annuity for which the cash flows occur at the beginning of the period.
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| annuity | A level stream of cash flows for a fixed period of time.
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| arithmetic average return | The return earned in an average year over a multiyear period.
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| asked price | The price a dealer is willing to take for a security.
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| average accounting return (AAR) | An investment's average net income divided by its average book value.
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| average tax rate | Total taxes paid divided by total taxable income.
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| balance sheet | Financial statement showing a firm's accounting value on a particular date.
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| bankruptcy | A legal proceeding for liquidating or reorganizing a business.
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| bearer form | The form of bond issue in which the bond is issued without record of the owner's name; payment is made to whoever holds the bond.
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| best efforts underwriting | The type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility.
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| beta coefficient | The amount of systematic risk present in a particular risky asset relative to that in an average risky asset.
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| bid price | The price a dealer is willing to pay for a security.
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| bid-ask spread | The difference between the bid price and the asked price.
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| broker | An agent who arranges security transactions among investors.
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| business risk | The equity risk that comes from the nature of the firm's operating activities.
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| call option | (1) An option that gives the owner the right, but not the obligation, to buy an asset. (2) The right to buy an asset at a fixed price during a particular period of time.
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| call premium | The amount by which the call price exceeds the par value of the bond.
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| call protected bond | A bond that, during a certain period, cannot be redeemed by the issuer.
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| call provision | An agreement giving the corporation the option to repurchase the bond at a specified price prior to maturity.
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| capital asset pricing model (CAPM) | The equation of the SML showing the relationship between expected return and beta.
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| capital budgeting | The process of planning and managing a firm's long-term investments.
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| capital gains yield | The dividend growth rate, or the rate at which the value of an investment grows.
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| capital intensity ratio | A firm's total assets divided by its sales, or the amount of assets needed to generate $1 in sales.
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| capital rationing | The situation that exists if a firm has positive NPV projects but cannot find the necessary financing.
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| capital structure | The mixture of debt and equity maintained by a firm.
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| captive finance company | A wholly owned subsidiary that handles the credit function for the parent company.
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| carrying costs | Costs that rise with increases in the level of investment in current assets.
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| cash break-even | The sales level that results in a zero operating cash flow.
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| cash budget | A forecast of cash receipts and disbursements for the next planning period.
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| cash concentration | The practice of and procedures for moving cash from multiple banks into the firm's main accounts.
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| cash cycle | The time between cash disbursement and cash collection.
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| cash discount | A discount given to induce prompt payment. Also, sales discount.
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| cash flow from assets | The total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital.
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| cash flow time line | A graphical representation of the operating cycle and the cash cycle.
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| cash flow to creditors | A firm's interest payments to creditors less net new borrowings.
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| cash flow to stockholders | Dividends paid out by a firm less net new equity raised.
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| clean price | The price of a bond net of accrued interest; this is the price that is typically quoted.
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| clientele effect | The observable fact that stocks attract particular groups based on dividend yield and the resulting tax effects.
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| collection policy | The procedures followed by a firm in collecting accounts receivable.
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| commission brokers | NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor.
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| common stock | Equity without priority for dividends or in bankruptcy.
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| common-size statement | A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.
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| common–base year statement | A standardized financial statement presenting all items relative to a certain base-year amount.
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| compensating balance | Money kept by the firm with a bank in low-interest or non-interest-bearing accounts as part of a loan agreement.
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| compound interest | Interest earned on both the initial principal and the interest reinvested from prior periods.
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| compounding | The process of accumulating interest on an investment over time to earn more interest.
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| consol | A type of perpetuity.
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| consolidation | A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to exist.
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| contingency planning | Taking into account the managerial options implicit in a project.
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| controlled disbursement account | A disbursement account to which the firm transfers an amount that is sufficient to cover demands for payment.
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| conversion premium | The difference between the conversion price and the current stock price, divided by the current stock price.
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| conversion price | The dollar amount of a bond's par value that is exchangeable for one share of stock.
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| conversion ratio | The number of shares per bond received for conversion into stock.
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| conversion value | The value a convertible bond would have if it were to be immediately converted into common stock.
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| convertible bond | A bond that can be exchanged for a fixed number of shares of stock for a specified amount of time.
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| corporation | A business created as a distinct legal entity composed of one or more individuals or entities.
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| cost of capital | The minimum required return on a new investment.
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| cost of debt | The return that lenders require on the firm's debt.
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| cost of equity | The return that equity investors require on their investment in the firm.
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| coupon rate | The annual coupon divided by the face value of a bond.
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| coupon | The stated interest payment made on a bond.
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| credit analysis | The process of determining the probability that customers will not pay.
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| credit cost curve | A graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy.
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| credit instrument | The evidence of indebtedness.
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| credit period | The length of time for which credit is granted.
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| credit scoring | The process of quantifying the probability of default when granting consumer credit.
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| cross-hedging | Hedging an asset with contracts written on a closely related, but not identical, asset.
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| cross-rate | The implicit exchange rate between two currencies (usually non-U.S.) quoted in some third currency (usually the U.S. dollar).
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| cumulative voting | A procedure in which a shareholder may cast all votes for one member of the board of directors.
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| current yield | A bond's annual coupon divided by its price.
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| date of payment | The date the dividend checks are mailed.
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| date of record | The date by which a holder must be on record in order to be designated to receive a dividend.
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| dealer | An agent who buys and sells securities from inventory.
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| debenture | An unsecured debt, usually with a maturity of 10 years or more.
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| declaration date | The date on which the board of directors passes a resolution to pay a dividend.
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| default risk premium | The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.
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| deferred call provision | A call provision prohibiting the company from redeeming the bond prior to a certain date.
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| degree of operating leverage (DOL) | The percentage change in operating cash flow relative to the percentage change in quantity sold.
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| delta | Measures the effect on an option's value of a small change in the value of the underlying stock.
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| depreciation tax shield | The tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate.
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| derivative security | A financial asset that represents a claim to another financial asset.
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| dilution | Loss in existing shareholders' value, in terms of either ownership, market value, book value, or EPS.
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| direct bankruptcy costs | The costs that are directly associated with bankruptcy, such as legal and administrative expenses.
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| dirty price | The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.
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| discount rate | The rate used to calculate the present value of future cash flows.
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| discount | Calculate the present value of some future amount.
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| discounted cash flow (DCF) valuation | (1) Calculating the present value of a future cash flow to determine its value today. (2) The process of valuing an investment by discounting its future cash flows.
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| discounted payback period | The length of time required for an investment's discounted cash flows to equal its initial cost.
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| distribution | A payment made by a firm to its owners from sources other than current or accumulated retained earnings.
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| divestiture | The sale of assets, operations, divisions, and/or segments of a business to a third party.
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| dividend growth model | A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate.
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| dividend payout ratio | The amount of cash paid out to shareholders divided by net income.
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| dividend yield | A stock's expected cash dividend divided by its current price.
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| dividend | A payment made out of a firm's earnings to its owners, in the form of either cash or stock.
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| dividends | Payments by a corporation to shareholders, made in either cash or stock.
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| Du Pont identity | Popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage.
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| Dutch auction underwriting | The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.
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| economic exposure | Long-term financial risk arising from permanent changes in prices or other economic fundamentals.
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| economic order quantity (EOQ) | The restocking quantity that minimizes the total inventory costs.
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| effective annual rate (EAR) | The interest rate expressed as if it were compounded once per year.
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| efficient capital market | A market in which security prices reflect available information.
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| efficient markets hypothesis (EMH) | The hypothesis that actual capital markets, such as the NYSE, are efficient.
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| electronic communications network (ECN) | A Web site that allows investors to trade directly with each other.
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| employee stock option (ESO) | An option granted to an employee by a company giving the employee the right to buy shares of stock in the company at a fixed price for a fixed time.
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| equity carve-out | The sale of stock in a wholly owned subsidiary via an IPO.
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| equivalent annual cost (EAC) | The present value of a project's costs calculated on an annual basis.
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| erosion | The cash flows of a new project that come at the expense of a firm's existing projects.
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| Eurobonds | International bonds issued in multiple countries but denominated in a single currency (usually the issuer's currency).
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| Eurocurrency | Money deposited in a financial center outside of the country whose currency is involved.
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| European option | An option that may only be exercised on the expiration date.
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| ex-dividend date | The date two business days before the date of record, establishing those individuals entitled to a dividend.
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| ex-rights date | The beginning of the period when stock is sold without a recently declared right, normally two trading days before the holder-of-record date.
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| exchange rate risk | The risk related to having international operations in a world where relative currency values vary.
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| exchange rate | The price of one country's currency expressed in terms of another country's currency.
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| exercising the option | The act of buying or selling the underlying asset via the option contract.
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| expected return | The return on a risky asset expected in the future.
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| expiration date | The last day on which an option may be exercised.
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| face value | The principal amount of a bond that is repaid at the end of the term. Also, par value.
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| financial break-even | The sales level that results in a zero NPV.
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| financial distress costs | The direct and indirect costs associated with going bankrupt or experiencing financial distress.
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| financial lease | Typically a longer-term, fully amortized lease under which the lessee is responsible for maintenance, taxes, and insurance. Usually not cancelable by the lessee without penalty.
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| financial ratios | Relationships determined from a firm's financial information and used for comparison purposes.
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| financial risk | The equity risk that comes from the financial policy (i.e., capital structure) of the firm.
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| firm commitment underwriting | The type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.
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| Fisher effect | The relationship between nominal returns, real returns, and inflation.
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| five C's of credit | The five basic credit factors to be evaluated: character, capacity, capital, collateral, and conditions.
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| fixed costs | Costs that do not change when the quantity of output changes during a particular time period.
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| float | The difference between book cash and bank cash, representing the net effect of checks in the process of clearing.
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| floor brokers | NYSE members who execute orders for commission brokers on a fee basis; sometimes called $2 brokers.
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| floor traders | NYSE members who trade for their own accounts, trying to anticipate temporary price fluctuations.
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| forecasting risk | The possibility that errors in projected cash flows will lead to incorrect decisions. Also, estimation risk.
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| foreign bonds | International bonds issued in a single country, usually denominated in that country's currency.
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| foreign exchange market | The market in which one country's currency is traded for another's.
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| forward contract | A legally binding agreement between two parties calling for the sale of an asset or product in the future at a price agreed upon today.
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| forward exchange rate | The agreed-upon exchange rate to be used in a forward trade.
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| forward trade | An agreement to exchange currency at some time in the future.
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| free cash flow | Another name for cash flow from assets.
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| future value (FV) | The amount an investment is worth after one or more periods.
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| futures contract | A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date.
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| general cash offer | An issue of securities offered for sale to the general public on a cash basis.
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| Generally Accepted Accounting Principles (GAAP) | The common set of standards and procedures by which audited financial statements are prepared.
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| geometric average return | The average compound return earned per year over a multiyear period.
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| gilts | British and Irish government securities.
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| going-private transactions | Transactions in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group.
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| Green Shoe provision | A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price. Also called the overallotment option.
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| greenmail | In a targeted stock repurchase, payments made to potential bidders to eliminate unfriendly takeover attempts.
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| gross spread | Compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price.
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| hard rationing | The situation that occurs when a business cannot raise financing for a project under any circumstances.
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| hedging | Reducing a firm's exposure to price or rate fluctuations. Also, immunization.
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| holder-of-record date | The date on which existing shareholders on company records are designated as the recipients of stock rights. Also, the date of record.
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| homemade dividend policy | The tailored dividend policy created by individual investors who undo corporate dividend policy by reinvesting dividends or selling shares of stock.
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| homemade leverage | The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed.
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| implied standard deviation | An estimate of the future standard deviation of the return on an asset obtained from the Black-Scholes OPM.
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| income statement | Financial statement summarizing a firm's performance over a period of time.
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| incremental cash flows | The difference between a firm's future cash flows with a project and those without the project.
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| indenture | The written agreement between the corporation and the lender detailing the terms of the debt issue.
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| indirect bankruptcy costs | The costs of avoiding a bankruptcy filing incurred by a financially distressed firm.
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| inflation premium | The portion of a nominal interest rate that represents compensation for expected future inflation.
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| information content effect | The market's reaction to a change in corporate dividend payout.
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| initial public offering | A company's first equity issue made available to the public. Also called an unseasoned new issue or an IPO.
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| inside quotes | Highest bid quotes and lowest ask quotes offered by dealers for a security.
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| interest on interest | Interest earned on the reinvestment of previous interest payments.
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| interest rate parity (IRP) | The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate.
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| interest rate risk premium | The compensation investors demand for bearing interest rate risk.
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| interest tax shield | The tax saving attained by a firm from interest expense.
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| internal growth rate | The maximum growth rate a firm can achieve without external financing of any kind.
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| internal rate of return (IRR) | The discount rate that makes the NPV of an investment zero.
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| international Fisher effect (IFE) | The theory that real interest rates are equal across countries.
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| intrinsic value | The lower bound of an option's value, or what the option would be worth if it were about to expire.
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| inventory loan | A secured short-term loan to purchase inventory.
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| inventory period | The time it takes to acquire and sell inventory.
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| investment timing decision | The evaluation of the optimal time to begin a project.
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| invoice | A bill for goods or services provided by the seller to the purchaser.
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| joint venture | Typically an agreement between firms to create a separate, co-owned entity established to pursue a joint goal.
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| just-in-time (JIT) inventory | A system for managing demand-dependent inventories that minimizes inventory holdings.
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| lessee | The user of an asset in a leasing agreement. The lessee makes payments to the lessor.
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| lessor | The owner of an asset in a leasing agreement. The lessor receives payments from the lessee.
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| leveraged buyouts (LBOs) | Going-private transactions in which a large percentage of the money used to buy the stock is borrowed. Oftentimes, incumbent management is involved.
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| leveraged lease | A financial lease in which the lessor borrows a substantial fraction of the cost of the leased asset on a nonrecourse basis.
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| line of credit | A formal (committed) or informal (noncommitted) prearranged, short-term bank loan.
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| liquidation | Termination of the firm as a going concern.
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| liquidity premium | The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.
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| lockboxes | Special post office boxes set up to intercept and speed up accounts receivable payments.
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| lockup agreement | The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.
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| London Interbank Offer Rate (LIBOR) | The rate most international banks charge one another for overnight Eurodollar loans.
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| M&M Proposition I | The proposition that the value of the firm is independent of the firm's capital structure.
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| M&M Proposition II | The proposition that a firm's cost of equity capital is a positive linear function of the firm's capital structure.
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| managerial options | Opportunities that managers can exploit if certain things happen in the future.
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| marginal tax rate | Amount of tax payable on the next dollar earned.
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| marginal, or incremental, cost | the change in costs that occurs when there is a small change in output.
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| marginal, or incremental, revenue | The change in revenue that occurs when there is a small change in output.
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| market risk premium | The slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate.
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| materials requirements planning (MRP) | A set of procedures used to determine inventory levels for demand-dependent inventory types such as work-in-progress and raw materials.
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| maturity | Specified date on which the principal amount of a bond is paid.
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| member | The owner of a seat on the NYSE.
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| merger | The complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity.
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| multiple rates of return | The possibility that more than one discount rate will make the NPV of an investment zero.
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| mutually exclusive investment decisions | A situation in which taking one investment prevents the taking of another.
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| net advantage to leasing (NAL) | The NPV that is calculated when deciding whether to lease an asset or to buy it.
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| net present value (NPV) | The difference between an investment's market value and its cost.
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| net present value profile | A graphical representation of the relationship between an investment's NPVs and various discount rates.
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| net working capital | Current assets less current liabilities.
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| nominal rates | Interest rates or rates of return that have not been adjusted for inflation.
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| noncash items | Expenses charged against revenues that do not directly affect cash flow, such as depreciation.
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| normal distribution | A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation.
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| note | An unsecured debt, usually with a maturity under 10 years.
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| operating cash flow | Cash generated from a firm's normal business activities.
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| operating cycle | The time period between the acquisition of inventory and the collection of cash from receivables.
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| operating lease | Usually a shorter-term lease under which the lessor is responsible for insurance, taxes, and upkeep. May be cancelable by the lessee on short notice.
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| opportunity cost | The most valuable alternative that is given up if a particular investment is undertaken.
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| option contract | An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time.
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| order flow | The flow of customer orders to buy and sell securities.
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| over-the-counter (OTC) market | Securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories.
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| oversubscription privilege | A privilege that allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.
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| partnership | A business formed by two or more individuals or entities.
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| payback period | The amount of time required for an investment to generate cash flows sufficient to recover its initial cost.
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| payoff profile | A plot showing the gains and losses that will occur on a contract as the result of unexpected price changes.
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| percentage of sales approach | A financial planning method in which accounts are varied depending on a firm's predicted sales level.
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| perpetuity | An annuity in which the cash flows continue forever.
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| planning horizon | The long-range time period on which the financial planning process focuses, usually the next two to five years.
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| poison pill | A financial device designed to make unfriendly takeover attempts unappealing, if not impossible.
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| political risk | Risk related to changes in value that arise because of political actions.
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| portfolio weight | A percentage of a portfolio's total value that is in a particular asset.
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| portfolio | A group of assets such as stocks and bonds held by an investor.
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| precautionary motive | The need to hold cash as a safety margin to act as a financial reserve.
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| preferred stock | Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.
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| present value (PV) | The current value of future cash flows discounted at the appropriate discount rate.
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| primary market | The market in which new securities are originally sold to investors.
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| principle of diversification | Spreading an investment across a number of assets will eliminate some, but not all, of the risk.
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| private placements | Loans, usually long-term in nature, provided directly by a limited number of investors.
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| pro forma financial statements | Financial statements projecting future years' operations.
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| profitability index (PI) | The present value of an investment's future cash flows divided by its initial cost. Also, benefit-cost ratio
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| prospectus | A legal document describing details of the issuing corporation and the proposed offering to potential investors.
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| protective covenant | A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest.
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| protective put | The purchase of stock and a put option on the stock to limit the downside risk associated with the stock.
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| proxy contest | An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace existing management.
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| proxy | A grant of authority by a shareholder allowing another individual to vote his/her shares.
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| purchasing power parity (PPP) | The idea that the exchange rate adjusts to keep purchasing power constant among currencies.
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| pure play approach | The use of a WACC that is unique to a particular project, based on companies in similar lines of business.
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| put option | (1) An option that gives the owner the right, but not the obligation, to sell an asset. (2)The right to sell an asset at a fixed price during a particular period of time. The opposite of a call option.
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| put-call parity (PCP) | The relationship between the prices of the underlying stock, a call option, a put option, and a riskless asset.
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| real option | An option that involves real assets as opposed to financial assets such as shares of stock.
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| real rates | Interest rates or rates of return that have been adjusted for inflation.
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| red herring | A preliminary prospectus distributed to prospective investors in a new issue of securities.
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| registered form | The form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record.
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| registration statement | A statement filed with the SEC that discloses all material information concerning the corporation making a public offering.
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| regular cash dividend | A cash payment made by a firm to its owners in the normal course of business, usually made four times a year.
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| Regulation A | An SEC regulation that exempts public issues of less than $5 million from most registration requirements.
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| reorganization | Financial restructuring of a failing firm to attempt to continue operations as a going concern.
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| repurchase | Another method used to pay out a firm's earnings to its owners, which provides more preferable tax treatment than dividends.
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| residual dividend approach | A policy under which a firm pays dividends only after meeting its investment needs while maintaining a desired debt-equity ratio.
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| retention ratio | The addition to retained earnings divided by net income. Also called the plowback ratio.
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| reverse split | A stock split in which a firm's number of shares outstanding is reduced.
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| rho | Measures the sensitivity of an option's value to a change in the risk-free rate.
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| rights offer | A public issue of securities in which securities are first offered to existing shareholders. Also called a rights offering.
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| risk premium | The excess return required from an investment in a risky asset over that required from a risk-free investment.
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| risk profile | A plot showing how the value of the firm is affected by changes in prices or rates.
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| sale and leaseback | A financial lease in which the lessee sells an asset to the lessor and then leases it back.
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| scenario analysis | The determination of what happens to NPV estimates when we ask what-if questions.
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| seasoned equity offering (SEO) | A new equity issue of securities by a company that has previously issued securities to the public.
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| secondary market | The market in which previously issued securities are traded among investors.
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| security market line (SML) | A positively sloped straight line displaying the relationship between expected return and beta.
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| share rights plans | Provisions allowing existing stockholders to purchase stock at some fixed price should an outside takeover bid come up, discouraging hostile takeover attempts.
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| shelf registration | Registration permitted by SEC Rule 415, which allows a company to register all issues it expects to sell within two years at one time, with subsequent sales at any time within those two years.
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| shortage costs | Costs that fall with increases in the level of investment in current assets.
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| simple interest | Interest earned only on the original principal amount invested.
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| simulation analysis | A combination of scenario and sensitivity analysis.
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| sinking fund | An account managed by the bond trustee for early bond redemption.
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| soft rationing | The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.
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| sole proprietorship | A business owned by a single individual.
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| sources of cash | A firm's activities that generate cash.
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| specialist's post | A fixed place on the exchange floor where the specialist operates.
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| specialist | A NYSE member acting as a dealer in a small number of securities on the exchange floor; often called a market maker.
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| speculative motive | The need to hold cash to take advantage of additional investment opportunities, such as bargain purchases.
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| spin-off | The distribution of shares in a subsidiary to existing parent company stockholders.
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| split-up | The splitting up of a company into two or more companies.
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| spot exchange rate | The exchange rate on a spot trade.
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| spot trade | An agreement to trade currencies based on the exchange rate today for settlement within two business days.
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| stakeholder | Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
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| stand-alone principle | The assumption that evaluation of a project may be based on the project's incremental cash flows.
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| standard deviation | The positive square root of the variance.
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| Standard Industrial Classification (SIC) code | A U.S. government code used to classify a firm by its type of business operations.
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| standby fee | An amount paid to an underwriter participating in a standby underwriting agreement.
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| standby underwriting | The type of underwriting in which the underwriter agrees to purchase the unsubscribed portion of the issue.
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| stated interest rate | The interest rate expressed in terms of the interest payment made each period. Also, quoted interest rate.
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| statement of cash flows | A firm's financial statement that summarizes its sources and uses of cash over a specified period.
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| static theory of capital structure | The theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.
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| stock dividend | A payment made by a firm to its owners in the form of stock, diluting the value of each share outstanding.
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| stock split | An increase in a firm's shares outstanding without any change in owners' equity.
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| straight bond value | The value a convertible bond would have if it could not be converted into common stock.
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| straight voting | A procedure in which a shareholder may cast all votes for each member of the board of directors.
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| strategic alliance | Agreement between firms to cooperate in pursuit of a joint goal.
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| strategic options | Options for future, related business products or strategies.
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| strike price | The fixed price in the option contract at which the holder can buy or sell the underlying asset. Also, the exercise price or striking price.
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| sunk cost | A cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision.
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| SuperDOT system | An electronic NYSE system allowing orders to be transmitted directly to the specialist.
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| sustainable growth rate | The maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio.
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| swap contract | An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future.
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| swaps | Agreements to exchange two securities or currencies.
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| syndicate | A group of underwriters formed to share the risk and to help sell an issue.
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| synergy | The positive incremental net gain associated with the combination of two firms through a merger or acquisition.
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| systematic risk principle | The expected return on a risky asset depends only on that asset's systematic risk.
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| systematic risk | A risk that influences a large number of assets. Also, market risk.
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| target payout ratio | A firm's long-term desired dividend-to-earnings ratio.
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| tax-oriented lease | A financial lease in which the lessor is the owner for tax purposes. Also called a true lease or a tax lease.
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| taxability premium | The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.
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| tender offer | A public offer by one firm to directly buy the shares of another firm.
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| term loans | Direct business loans of, typically, one to five years.
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| term structure of interest rates | The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.
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| terms of sale | The conditions under which a firm sells its goods and services for cash or credit.
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| theta | Measures the sensitivity of an option's value to a change in the time to expiration.
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| tombstone | An advertisement announcing a public offering.
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| trading range | The price range between the highest and lowest prices at which a stock is traded.
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| transaction motive | The need to hold cash to satisfy normal disbursement and collection activities associated with a firm's ongoing operations.
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| transactions exposure | Short-run financial risk arising from the need to buy or sell at uncertain prices or rates in the near future.
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| Treasury yield curve | A plot of the yields on Treasury notes and bonds relative to maturity.
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| unbiased forward rates (UFR) | The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate.
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| uncovered interest parity (UIP) | The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates.
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| underwriters | Investment firms that act as intermediaries between a company selling securities and the investing public.
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| unlevered cost of capital | The cost of capital of a firm that has no debt.
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| unsystematic risk | A risk that affects at most a small number of assets. Also, unique or asset-specific risk.
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| uses of cash | A firm's activities in which cash is spent. Also called applications of cash.
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| variable costs | Costs that change when the quantity of output changes.
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| variance | The average squared difference between the actual return and the average return.
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| vega | Measures the sensitivity of an option's value to a change in the standard deviation of the return on the underlying asset.
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| venture capital (VC) | Financing for new, often high-risk ventures.
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| warrant | A security that gives the holder the right to purchase shares of stock at a fixed price over a given period of time.
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| weighted average cost of capital (WACC) | The weighted average of the cost of equity and the aftertax cost of debt.
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| working capital | A firm's short-term assets and liabilities.
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| yield to maturity (YTM) | The rate required in the market on a bond.
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| zero coupon bond | A bond that makes no coupon payments, thus initially priced at a deep discount.
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| zero-balance account | A disbursement account in which the firm maintains a zero balance, transferring funds in from a master account only as needed to cover checks presented for payment.
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