Corporate Finance

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Opportunity Cost

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The cost of an alternative that must be forgone in order to pursue a certain action.

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Present Value

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Current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

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Discount Rate

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The interest rate charged to commercial banks and other depository institutions for loans received from the federal reserve bank's discount window. Refers to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows.

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book value

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the value at which an asset is carried on the balance sheet

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Net present Value

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The difference between the present value of cash inflows and the present value of cash outflows. Used in capital budgeting to analyze the profitablility of an investment or project.

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Inflation

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is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services consequently reducing purchase power per unit of money, a loss of real value in the medium of exchange.

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APR annual percentage rate

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annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

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Cost of capital

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Cost of funds used for financing a business. depends on the mode of financing used - it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt.

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Internal Rate of Return

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The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's _____ the more desireable it is to undertake the project. Can be used to rank several prospective projects a firm is considering.

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Coupon Rate

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The yeild paid by a fixed income security. A fixed income security's ______ is simply just the annual coupon payments paid by the issuer relative to the bond's face value. The yield the bond paid on its issue date.

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Yield

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the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

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Rate of Return

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The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains.

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dividend payout ratio

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the percentage of earnings paid to shareholders in dividends

yearly dividends / earnings per share

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Cost of equity capital

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the return that stockholders require for a company.

dividends per share / current stock value + Growth rate of dividends

represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership

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cash flow

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a revenue or expense stream that changes a cash account over a given period. Inflows usually arise from financing, operations or investing. Outflows result form expenses or investments. This holds true for both business and personal finance.

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Free cash flow

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a measure of financial performance calculated as operating cash flow minus capital exp. Represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Important bc it allows a company to pursue opp. that enhance shareholder value.

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capital gain

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increase in the value of a capital asset that gives it a higher worth than the purchase price. not realized until the asset is sold.

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earning growth rate

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a measure of growth in a company's net income over a specific period, often one year. The term can apply to actual data from previous periods or estimated data for future periods.

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weighted average cost of capital

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An average representing the expected return on all of a company's securities. Each source of capital, such as stocks, bonds, and other debt, is weighted in the calculation according to its prominence in the company's capital structure.

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interest rate

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rate at which is charged or paid for the use of money. often expressed as an annual % of the principal. It is calculated by dividing the amount of interest by the amount of principal. Often change as a result of inflation and federal reserve policy.

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market index

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an index which is designed to measure price changes of an overall market, such as the stock market or the bond market

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future value

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the value at some point in the future of a present amount of money

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perpetuity

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forever

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annuities

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a series of payments of set size and frequency

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EAR effective annual rate

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The actual annual interest that accrues, after taking into consideration the effects of compounding (when compounding occurs more than once a year)

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real rate of return

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rate of return after adjusting for inflation

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nominal rate

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the stated interest rate on a bond, un-adjusted for inflation

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discount cash flow

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a valuation method used to estimate the attractiveness of an investment opportunity. uses future free cash flow projections and iscounts them (using WACC) to arrive at a present value, which is used to evaluate the potential for investment.

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coupon bond

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an unregistered, negotiable, bond on which interest and principal are payable to the holder, regardless of whom it was originally issued to. Coupons are attached to the bond, and each coupon represents a single interest payment. The holder submits a coupon, usually semi-annually, to the issuer or paying agent to receive payment.

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zero coupon bond

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a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

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principal

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amount borrowed, or the part of the amount borrowed which remains unpaid. original investment.

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current yeild

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the annual rate of return on an investment, expressed as a percentage

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payback period

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the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.

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capital budgeting

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process in which a business determines whether projects such as building a new plant or investing in a long term venture are worth pursuing. Often, a prospective projec's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

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depreciation

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method of allocating the cost of a tangible asset over its useful life. a decrease in an asset's value caused by unfavorable market conditions.

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EBIT

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indicator of a company's profitablility, calculated as revenue minus expenses, excluding tax and interest.

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NOPAT

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A company's potential cash earnings if its capitalization were unlevereraged. Frequently used in economic value added calculattions.

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Cap ex

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funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.

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working capital

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measure of a company's efficiency and its short-term financial health. assets-liabilities

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NPVGO

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calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. used to determine the intrinsic value of a new project or acquisition at a given point in time.

net cash flow, discounted at firm's cost of capital, less the purchase price of additional asset.

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price earnings ratio

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a valuation ratio of a company's current share price compared to its per share earnings.

market value per share / earnings per share