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option
a contract that gives its holder the right, but not the obligation, to buy or sell an asset at some predetermined price within a specified period of time
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call option
allows the holder the right to buy the asset at some predetermined price witin a specified period of time; works to your advantage when stock prices go up
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put option
allows the holder the right to sell the asset at some predetermined price within a specified period of time
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stirke (exercise price)
the one stated in the option contract at which the security can be bought or sold
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in-the-money
a call option whose current stock price is greater than the strike (exercise) price
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out-of-the-money
a call option whose current stock price is less than the strike (exercise) price
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time value
option price - exercise value; additional value because the option has remaining time before it expires; represents extra amount over the option's immediate exercise value that a purchaser will pay for the chance the stock price will appreciate over time
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arbitrage
the simultaneous buying & selling of the same commodity or security in 2 different markets at different prices, thus yielding a risk-free return; you invested none of your own money; the replicating portfolio's payoffs exactly equal the payoffs you will owe because you wrote the option
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annual report
issued annually by a corp. to its stockholders; contains basic financial statements (balance sheet, income statement, statement of shareholder’s equity, & statement of cash flows), mgmt’s opinion of the past year’s operations & the firm’s future prospects
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balance sheet
statement of the firm’s financial position at a specific point in time; assets (company owned) listed on the left-hand side; liabilities & equity (claims against assets) on the right-hand side
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income statement
summarizes the firm’s revenues & expenses over an accounting period (reflect performance); net sales at the top, then costs (income taxes) are subtracted to obtain NI available to common stockholders; bottom reports earnings & dividends per share
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statement of stockholders’ equity
shows the beginning, any changes due to stock issues/repurchases, the amount of NI that is retained, & the ending
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statement of cash flows
reports the impact of a firm’s operating, investing, & financing activities on cash flows over an accounting period
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free cash flow (FCF)
the cash flow actually available for distribution to all investors after the company has made all investments in fixed assets & working capital necessary to sustain ongoing operations; value of operations depends on this
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net operating profit after taxes (NOPAT)
amount of profit a company would generate if it had no debt & no financial assets
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operating current assets (CA)
used to support normal operations; cash, AR, & Inventory; does NOT include short-term investments
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operating current liabilities (CL)
are a natural consequence of the firm's operations; AP & Accurals; does NOT include NP or any other short-term debt that charges interest
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total net operating capital or just operating capital
NOWC + operating long-term assests (net plant & equipment); equal to the net amount of capital raised by investors; the amount of interest-bearing debt (NP & long-term bonds) + preferred stock + common equity - short-term investments
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marginal tax rate
on the last unit of income
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progressive tax
system in which the higher one's income, the larger the percentage paid on taxes
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municipal bonds
issued by state & local governments; the interest earned on these is exempt from federal taxes & also from state taxes if the holder is a resident of the issuing state
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financial leverage
the extent to which fixed-income securities (debt & PS) are used in a firm's capital structure; high amounts of debt & PS then this is high; debt financing
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additional funds needed (AFN)
required from external sources to increase the firm's assets to support a sales increase (which normally require an increase in assets); usually offset by a spontaneous increase in liabities as well as by RE in the firm
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capital intensity ratio
the $ amount of assets required to produce a $ of sales; current year; A0*/S0*
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financing feedback
circularity created when additional debt causes additional interest expense (lowers NI), which reduces the addition to RE, which in turn requires a higher level of debt (more financing is needed), which causes still more interest expense, causing the cycle to be repeated
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