FN310 Chapter 1 Key Terms

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  1.                Sarbanes-Oxley Act
    A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate
  2.                Proprietorship
    An unincorporated business owned by one individual.
  3.                Partnership 
    An unincorporated business owned by two or more persons.
  4.                Corporation 
    A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.
  5.                S Corporation
    A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation yet retains limited liability and other corporate benefits.
  6.                Limited Liability Company (LLC)
    A relatively new type of organization that is a hybrid between a partnership and a corporation. 
  7.                Limited Liability Partnership (LLP)
    Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It has limited liability like corporations but is taxed like partnerships.
  8.                Shareholder Wealth Maximization 
    The primary goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm's common stock.
  9.                Intrinsic Value
    An estimate of a stock's "true" value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely. 
  10.           Market Price
    The stock value based on perceived but possibly incorrect information as seen by the marginal investor. 
  11. Marginal Investor
    An investor whose views determine the actual stock price.
  12.                Equilibrium 
    The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying or selling a stock.
  13.                Corporate Raider
    An individual who targets a corporation for takeover because it is undervalued. 
  14. Hostile Takeover
    The acquisition of a company over the opposition of its management.
  15. Spot Markets
    The markets in which assets are bought or sold for "on-the-spot" delivery.
  16. Future Markets 
    The markets in which participants agree today to buy or sell an asset as some future date. 
  17. Money Markets 
    The financial markets in which funds are borrowed or loaned for short periods (less than one year).
  18. Capital Markets 
    The financial markets for stocks and for intermediate- or long-term debt (one year or longer).
  19. Primary Markets 
    Markets in which corporations raise capital by issuing new securities. 
  20. Secondary Markets
    Markets in which securities and other financial assets are traded among investors after they have been issued by corporations. 
  21. Private Markets
    Markets in which transactions are worked out directly between two parties. 
  22. Public Markets
    Markets in which standardized contracts are traded on organized exchanges. 
  23. Derivative 
    Any financial asset whose value is derived from the value of some other "underlying" asset. 
  24. Investment Bank (iBank)
    And organization that underwrites and distributes new investment securities and helps businesses obtain financing.
  25. Commercial Bank
    The traditional department store of finance serving a variety of savers and borrowers.
  26. Financial Services Corporation
    A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. 
  27. Mutual Funds
    Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
  28. Money Market Funds
    Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts. 
  29. Physical Location Exchanges
    Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities. 
  30. Over-the-Counter (OTC) Market
    A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities. 
  31. Dealer Market
    Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges. 
  32. Closely Held Corporation
    A corporation that is owned by a few individuals who are typically associated with the firm's management. 
  33. Publicly Owned Corporations
    A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management. 
  34. Going Public
    The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
  35. Initial Public Offering (IPO) Market
    The market for stocks of companies that are in the process of going public. 
  36. Efficient Markets Hypothesis (EMH)
    Cornerstone of modern finance theory. On average, asset prices are about equal to their intrinsic values.

    "Too low"   buy, driving stock price to the proper level

    "Too high"  sell stock, pushing price down to its equilibrium level.
  37. Behavioral finance
    Investor psychology is examined in an effort to determine if stock prices have been bid up to unreasonable heights in a speculative bubble or driven down to unreasonable lows in a fit of irrational pessimism

    Part of market analysis
  38. Annual Report
    A report is issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.
  39. Balance Sheet
    A statement of a firm's financial position at a specific point in time. 
  40. Stockholder's Equity 
    It represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its organization.
  41. Retained Earnings
    They represent the cumulative total of all earnings kept by the company during its life. 
  42. Working Capital
    Current assets
  43. Net Working Capital
    Current assets - Current liabilities
  44. Net Operating Working Capital (NOWC)
    Current assets - Non-interest-bearing current liabilities
  45. Income Statement 
    A report summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter of a year.
  46. Operating Income
    Earnings from operations before interest and taxes (i.e. EBIT)
  47. Depreciation
    The charge to reflect the cost of assets used up in the production process. 

    Not a cash outlay
  48. Amortization
    A noncash charge similar to depreciation except that it is used to write off the costs of intangible assets.
  49. EBITDA
    Earnings before interest, taxes, depreciation, and amortization
  50. Statement of Stockholders' Equity
    A statement that shows by how much a firm's equity changed during the year and why this change occurred.
  51. Free Cash Flow (FCF)
    The amount of cash that could be withdrawn from a firm without harming its ability to operate and to produce future cash flows. 
  52. Net Operating Profit After Taxes (NOPAT)
    The profit a company would generate if it had no debt and held only operating assets.
  53. Market Value Added (MVA)
    market value of equity book value.
  54. Economic Value Added (EVA)
    NOPAT - capital costs
  55. Progressive Tax
    A tax system where the tax rate is higher on higher incomes. The personal income tax in the US, ranging from 0% for the lowest incomes and 35% for the highest, is progressive.
  56. Marginal Tax Rate
    The tax rate applicable to the last unit of a person's income.
  57. Average Tax Rate
    Taxes paid / Taxable income
  58. Capital Gain (Loss)
    The profit (loss) from the sale of a capital asset for more (less) than its purchase price.
  59. Alternative Minimum Tax (AMT)
    Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
  60. Tax Loss Carry-Back or Carry-Forward
    Ordinary corporate operating losses can be carried backward for 2 years and forward for 20 years to offset taxable income in a given year.
  61. Liquid Asset
    Converted to cash quickly with little reduction in the asset's price
  62. Liquidity Ratios
    Show relationships of a firm's cash and other current assets to its current liabilities.
  63. Current Ratio
    Current assets / Current liabilities

    Indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
  64. Quick (Acid Test) Ratio
    (Current assets - Inventories) / Current liabilities
  65. Asset Management Ratios
    A set of ratios that measure how effectively a firm is managing its assets.
  66. Inventory Turnover Ratio
    Sales / Inventories
  67. Days Sales Outstanding (DSO) Ratio
    Receivables / Average sales per day

    Indicates the average length of time the firm must wait after making a sale before it receives cash.
  68. Fixed Assets Turnover Ratio
    Sales / Net fixed assets
  69. Total Assets Turnover Ratio
    Sales / Total assets
  70. Debt Ratio
    Total debt / Total assets
  71. Times-Interest-Earned (TIE) Ratio
    EBIT / Interest Charges

    Measure of the firm's ability to meet its annual interest payments
  72. Profitability Ratios
    A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
  73. Operating Margin
    EBIT / Sales
  74. Profit Margin
    Net Income / Sales
  75. Return on Total Assets (ROA)
    Net income / Total assets
  76. Basic Earning Power (BEP) Ratio
    Indicates the ability of the firm's assets to generate operating income

    EBIT / Total assets
  77. Return on Common Equity (ROE)
    Net income / Common equity

    Rate of return on stockholders' investment
  78. Market Value Ratios
    Relate the firm's stock price to its earnings and book value per share
  79. Price/Earnings (P/E) Ratio
    Price per share / Earnings per share

    Shows the dollar amount investors will pay for $1 of current earnings
  80. Market/Book (M/B) Ratio
    Market price per share / Book value per share
  81. DuPont Equation
    Shows rate of return on equity can be found as the product of 
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FN310 Chapter 1 Key Terms
Exam 1 Material
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