Financial analysis test 2

  1. Net Present Value (NPV)
    A sophisticated capital budgeting technique; found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.
  2. Payback Period
    The amount of time required for a firm to recover it's initial investment in a project, as calculated from cash inflows.
  3. ranking approach
    The ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return.
  4. accept-reject approach
    the evaluation of capital expenditure proposals to setermine whether they meet the firm's minimum acceptance criterion.
  5. Capital rationing
    The financial situation in which a firm has only a fixed number of dollars available for capital expenditures, and numerous projects compete for these dollars.
  6. Unlimited funds
    the financial situation in which a firm is able to accept all independent projects that provide an acceptable return.
  7. Mutually exclusiveprojects
    Projects that compete with one another, so that the acceptance of one eliminates from further consideration all other projects that serve a similar function
  8. independent projects
    Projects whose cash flows are unrelatd to (or independent of) one another; the acceptance of one does not eliminate the others from further consideration.
  9. Capital budgeting process
    Five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up.
  10. Operating Expenditure
    an outlay of funds by the firm resulting in benefits received within 1 year.
    An outlay of funds by the firm that is expected to produce benefits over a period of time greater than 1 year.
  12. Capital Budgeting
    The process of evaluating and selecting long term investments that are consistent with the firm's goal of maximizing owner's wealth.
  13. Debt
    Includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payments
  14. Equity
    Funds provided by the firm's owners (investors or stockholders) that are repaid subject to the firm's performance.
  15. privatley owned (stock)
    The common stock of a firm is owned by private investors; this stock is not publicly traded.
  16. publicly owned (stock)
    The common stock of a firm is owned by public investors; this stock is publicly traded.
  17. closley owned (stock)
    The common stock of a firm is owned by an individual or a small group of investors (such as a family); these are usually privately owned companies.
  18. widely owned (stock)
    The common stock of a firm is owned by many unrelated individual or institutional investors.
  19. par-value common stock
    An arbitrary value established for legal purposes in the firm's corporate charter and which can be used to find the total number of shares oustanding by dividing it into the book value of common stock.
  20. preemptive right
    Allows common stockholders to maintain their proportionate ownership in the corporation when new shares are issued, thus protecting them from dilution of their ownership.
  21. dilution of ownership
    A reduction in each previous shareholder's fractional ownership resulting from the issuance of additional shares of common stock.
  22. dilution of earnings
    A reduction in each previous shareholder's fractional claim on the firm's earnings resulting from the issuance of additional shares of common stock.
  23. rights
    Financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.
  24. authorized shares
    Shares of common stock that a firm's corporate charter allows it to issue.
  25. outstanding shares
    issued shares of common stock held by investors, including both private and public investors.
  26. treasury stock
    issued shares of common stock held by the firm; often these shares have been repurchased by the firm.
  27. issued shares
    shares of common stock that have been put into circulation; the sum of outstanding shares and treasury stock.
  28. proxy statement
    a statement transfering the votes of a stockholder to another party.
  29. proxy battle
    The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes.
  30. supervoting shares
    Stock that carries with it multiple votes per share rather than the single vote per share typically given on regular shares of common stock.
  31. nonvoting common stock
    Common stock that carries no voting rights; issued when the firm wishes to raise capital through the sale of common stock but does not want to give up its voting control.
  32. American depositary shares (ADSs)
    Dollar-denominated receipts for the stocks of foreign companies that are held by a U.S. financial institution overseas.
  33. American depositary receipts (ADRs)
    Securities, backed by American depositary shares (ADSs), that permit U.S. investors to hld shares of non-U.S. companies and trade them in U.S. markets.
  34. par-value preferred stock
    Preferred stock with a stated face value that is used with the specified dividend percentage to determine the annual dollar dividend.
  35. no-par preferred stock
    Preferred stock with no stated face value but with a stated annual dollar dividend.
  36. cumulative (preferred stock)
    Preferred stock for which all passed (unpaid) dividends in arrears, along with the current dividend, must be paid before dividends can be paid to common stockholders.
  37. noncumulative (preferred stock)
    Preferred stock for which passed (unpaid) dividends do not accumulate.
  38. Callable feature (preferred stock)
    A feature of callable preferred stock that allows the issuer to retire the shares within a certain period of time and at a specified price.
  39. conversion fature (preferred stock)
    A feature of convertible preferred stock that allows holders to change each share into a stated number of shares of common stock.
  40. venture capital
    Privately raised external equity capital used to fund early-stage firms with attractive growth prospects.
  41. venture capitalists (VCs)
    Providers of venture capital; typically, formal businesses that maintain strong oversight over the firms they invest in and that have clearly defined exit strategies.
  42. angel capitalists (angels)
    Wealthy individual investors who do not operate as a business but invest in promising early-stage companies in exchange for a portion of the firm's equity.
  43. prospectus
    A portion of a security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.
  44. Red herring
    A preliminary prospectus made available to prospective investors during the waiting period between the registration statement's filing with the SEC and its approval.
  45. investment banker
    Financial intermediary that specializes in selling new security issues and advising firms with regard to major financial transactions.
  46. underwriting
    The role of the investment banker in bearing the risk of reselling, at a profit, the securities purchased from an issuing corporation at an agreed-on price.
  47. underwriting syndicate
    A group of other bankers formed by an investment banker to share the financial risk associated with underwriting new securities.
  48. selling group
    A large number of brokerage firms that join the originating investment banker(s); each accepts responsibility for selling a certain portion of a new security issue on a commission basis.
  49. efficient-market hypothesis (EMH)
    Theory describing the behavior of an assumed "perfect" market in which (1) securities are in equilibrium, (2) security prices fully reflect all available information and react swiftly to new information, and (3), because stocks are fully andfairly priced, investors need not waste time looking for mispriced securities.
  50. behavioral finance
    A growing body of research that focuses on investor behavior and its impact on investment decisions and stock prices. Advocates are commonly referred to as "behaviorists"
  51. zero-growth model
    An approach to dividend valuation that assumes a constant, nongrowing dividend stream.
  52. constant-growth model
    A widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but a rate that is less than the required return.
  53. Gordon Growth model
    A common name for the Constant growth model that is widely cited in dividend valuation.
  54. variable-growth model
    A dividend valuation approach that allows for a change in the dividend growth rate.
  55. Free cash flow valuation model
    A model that determines the value of an entire company as the present value of its expected free cash flows discounted at the firm's weighted average cost of capital, which is its expected average future cost of funds over the long run.
  56. book value per share
    The amount per share of common stock that would be received if all of the firm's assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preferred stock) were divided among the common stockholders.
  57. liquidation value per share
    The actual amount per share of common stock that would be received if all of the firm's assets were sold for their market value, liabilities (including preferred stock) were paid, and any remaining money were divided among the common stockholders.
  58. price/earnings multiple approach
    A popular technique used to estimate the firm's share value; calculated by multiplying the firm's ecpected earnings per share (EPS) by the average price/ earnings (P/E) ratio for the industry.
  59. portfolio
    A collection or group of assets
  60. risk
    A measure of the uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset.
  61. total rate of return
    The total gain or loss experienced on an investment over a given period of time; calculated by dividing the asset's cash distributions during the period, plus change in value, by its beginning-of-period investment value.
  62. risk averse
    The attitude toward risk in which investors would require an increased return as compensation for an increase in risk.
  63. risk neutral
    The attitude toward risk in which investors choose the investment with the higher return regardless of its risk.
  64. risk seeking
    The attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns
  65. scenario analysis
    An approach for assessing risk that uses several possible alternative outcomes (scenarios) to obtain a sense of the variability among returns.
  66. range
    a measure of an asset's risk, which is found by subtracting the return associated with the pessimistic (worst) outcome from the return associated with the optomistic (best) outcome.
  67. probability
    the chance that a given outcome will occur.
  68. probability distribution
    A model that relates probabilities to the associated outcomes
  69. bar chart
    The simplest type of probability distribution; shows only a limited number of outcomes and associated probabilities for a given event.
  70. continuous probability distribution
    A probability distribution showing all the possible outcomes and associated probabilities for a given event.
  71. standard deviation (or)
    The most common statistical indicator of an asset's risk; it measures the dispersion around the expected value.
  72. expected value of a return (r)
    The average return that an investment is expected to produce over time.
  73. normal probability distribution
    A symmetrical probability distribution whose shape resembles a "bell-shaped" curve.
  74. coefficient of variation (CV)
    A measure of relative dispersion that is useful in comparing the risks of assets with differing expected returns.
  75. efficient portfolio
    A portfolio that maximizes return for a given level of risk.
  76. correlation
    A statistical measure of the relationship between any two series of numbers.
  77. positively correlated
    Describes two series that move in the same direction.
  78. Negatively correlated
    Describes two series that move in opposite directions.
  79. correlation coefficient
    A measure of the degree of correlation between two series.
  80. perfectly positively correlated
    Describes two positively correlated series that have a correlation coefficient of +1
  81. perfectly negatively correlated
    Describes two neagtively correlated series that have a correlation coefficient of -1
  82. un correlated
    Describes two series that lack any interaction and therefore have a correlation coefficient close to zero.
  83. political risk
    Risk that arises from the possinility that a host government will take actions harmful to foreign investors or that political turmoil will endanger investments.
  84. capital asset pricing model (CAPM)
    The basic theory that links risk and return for all assets
  85. total risk
    The combination of a security's nondiversifiable risk and diversifiable risk.
  86. diversifiable risk
    The portion of an asset's risk that is attributable to firm-specific, random causes; can be eliminated through diversification. Also called unsystematic risk.
  87. nondiversifiable risk
    The relevant portion of an asset's risk attributable to market factors that affect all firms; cannot be eliminated through diversification. Also called systematic risk.
  88. beta coefficient (b)
    A relative measure of nondiversifiable risk. an index of the degree of movement of an asset's return in response to a change in the market return.
  89. market return
    The return on the market portfolio of all traded securities.
  90. risk-free rate of return, (RF)
    The required return on a risk-free asset, typically a 3 - month U.S. Treasury bill.
  91. U.S. Treasury bills (T-bills)
    Short-term IOUs issued by the US Treasury; considered the risk-free asset
  92. security market line (SML)
    The depiction of the capital asset pricing model (CAPM) as a graph that reflects the required return in the marketplace for each level of nondiversifiable risk (beta).
  93. Cost of Capital
    Represents the firm's cost of financing and is the minimum rate of return that a project must earn to increase firm value.
  94. cost of long-term debt
    the financing cost associated with new funds raised through long-term borrowing.
  95. net proceeds
    Funds actually received by the firm from the sale of a security.
  96. flotation costs
    the total costs of issuing and selling a security.
  97. cost of preferred stock, rp
    The ratio of the preferred stock dividend to the firm's net proceeds from the sale of preferred stock.
  98. cost of common stock equity, rs
    The rate at which investors discount the expected dividends of the firm to determine its share value.
  99. constant-growth valuation (Gordon growth) model
    Assumes that the value of a share of stock equals the present value of all future dividends (assumed to grow at a constant rate) that it is expected to provide over an infinite time horizon.
  100. capital asset pricing model (CAPM)
    Describes the relationship between the required return, rs, and the nondiversifiable risk of the firm as measured by the beta coefficient, b.
  101. cost of retained earnings, rr
    the same as the cost of an equivalent fully subscribed issue of additional common stock, which is equal to the cost of common stock equity, rs
  102. cost of a new issue of common stock, rn
    The cost of common stock, net of underpricing and associated flotation costs.
  103. underpriced
    Stock sold at a price below its current market price, P0.
  104. Weighted average cost of capital (WACC), ra
    Reflects the expected average future cost of capital over the long run; found by weighting the cost of each specific type of capital by its proportion in the firm's capital structure.
  105. book value weights
    Weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure
  106. market value weights
    Weights that use market values to measure the proportion of each type of capital in the firm's financial structure.
  107. historical weights
    Either book or market value weights based on actual capital structure proportions.
  108. target weights
    Either book or market value weights based on desired capital structure proportions.
Card Set
Financial analysis test 2
a lot of work to put all the prinicpals of managerial finance into flash cards.