Cf

Front 1

working capital

Back 1

A firm's short-term assets and liabilities.

Front 2

uses of cash

Back 2

A firm's activities in which cash is spent. Also called applications of cash.

Front 3

sustainable growth rate

Back 3

The maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio.

Front 4

statement of cash flows

Back 4

A firm's financial statement that summarizes its sources and uses of cash over a specified period.

Front 5

Standard Industrial Classification (SIC) code

Back 5

A U.S. government code used to classify a firm by its type of business operations.

Front 6

stakeholder

Back 6

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

Front 7

sources of cash

Back 7

A firm's activities that generate cash.

Front 8

sole proprietorship

Back 8

A business owned by a single individual.

Front 9

simple interest

Back 9

Interest earned only on the original principal amount invested.

Front 10

retention ratio

Back 10

The addition to retained earnings divided by net income. Also called the plowback ratio.

Front 11

present value (PV)

Back 11

The current value of future cash flows discounted at the appropriate discount rate.

Front 12

planning horizon

Back 12

The long-range time period on which the financial planning process focuses-- usually the next two to five years.

Front 13

percentage of sales approach

Back 13

A financial planning method in which accounts are varied depending on a firm's predicted sales level.

Front 14

partnership

Back 14

A business formed by two or more individuals or entities.

Front 15

operating cash flow

Back 15

Cash generated from a firm's normal business activities.

Front 16

noncash items

Back 16

Expenses charged against revenues that do not directly affect cash flow-- such as depreciation.

Front 17

net working capital

Back 17

Current assets less current liabilities.

Front 18

marginal tax rate

Back 18

Amount of tax payable on the next dollar earned.

Front 19

internal growth rate

Back 19

The maximum growth rate a firm can achieve without external financing of any kind.

Front 20

interest on interest

Back 20

Interest earned on the reinvestment of previous interest payments.

Front 21

income statement

Back 21

Financial statement summarizing a firm's performance over a period of time.

Front 22

Generally Accepted Accounting Principles (GAAP)

Back 22

The common set of standards and procedures by which audited financial statements are prepared.

Front 23

future value (FV)

Back 23

The amount an investment is worth after one or more periods.

Front 24

free cash flow

Back 24

Another name for cash flow from assets.

Front 25

financial ratios

Back 25

Relationships determined from a firm's financial information and used for comparison purposes.

Front 26

Du Pont identity

Back 26

Popular expression breaking ROE into three parts: operating efficiency-- asset use efficiency-- and financial leverage.

Front 27

dividend payout ratio

Back 27

The amount of cash paid out to shareholders divided by net income.

Front 28

discounted cash flow (DCF) valuation

Back 28

Calculating the present value of a future cash flow to determine its value today.

Front 29

discount

Back 29

Calculate the present value of some future amount.

Front 30

discount rate

Back 30

The rate used to calculate the present value of future cash flows.

Front 31

corporation

Back 31

A business created as a distinct legal entity composed of one or more individuals or entities.

Front 32

compounding

Back 32

The process of accumulating interest on an investment over time to earn more interest.

Front 33

compound interest

Back 33

Interest earned on both the initial principal and the interest reinvested from prior periods.

Front 34

common-size statement

Back 34

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.

Front 35

common–base year statement

Back 35

A standardized financial statement presenting all items relative to a certain base-year amount.

Front 36

cash flow to stockholders

Back 36

Dividends paid out by a firm less net new equity raised.

Front 37

cash flow to creditors

Back 37

A firm's interest payments to creditors less net new borrowings.

Front 38

cash flow from assets

Back 38

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.

Front 39

capital structure

Back 39

The mixture of debt and equity maintained by a firm.

Front 40

capital intensity ratio

Back 40

A firm's total assets divided by its sales-- or the amount of assets needed to generate $1 in sales.

Front 41

capital budgeting

Back 41

The process of planning and managing a firm's long-term investments.

Front 42

balance sheet

Back 42

Financial statement showing a firm's accounting value on a particular date.

Front 43

average tax rate

Back 43

Total taxes paid divided by total taxable income.

Front 44

aggregation

Back 44

The process by which smaller investment proposals of each of a firm's operational units are added up and treated as one big project.

Front 45

agency problem

Back 45

The possibility of conflict of interest between the stockholders and management of a firm.

Front 46

agency cost

Back 46

If management does not take the investment, then the stockholders may lose a valuable opportunity. This is one example of an agency cost.
More generally, the term agency costs refers to the costs of the conflict of interest between stockholders and management. These costs can be indirect or direct. An indirect agency cost is a lost opportunity, such as the one we have just described. Direct agency costs come in two forms. The first type is a corporate expenditure that benefits management but costs the stockholders. Perhaps the purchase of a luxurious and unneeded corporate jet would fall under this heading. The second type of direct agency cost is an expense that arises from the need to monitor management actions. Paying outside auditors to assess the accuracy of financial statement information could be one example.

Front 47

proxy fight

Back 47

A proxy is the authority to vote someone else’s stock. A proxy fight develops when a group solicits proxies in order to replace the existing board, and thereby replace existing management.