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74 Cards in this Set
- Front
- Back
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Measure of the investment performance of the overall market.
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Market Index
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Index of the investment performance of a portfolio of 30 "blue-chip" stocks.
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Dow Jones Industrial Average
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Index of the investment performance of a portfolio of 500 large stocks. Also called the S&P 500
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Standard & Poor's Composite Index
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Extra average return from investing in long-versus short-term Treasury Securities
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Maturity Premium
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Expected return in excess of risk-free return as compensation for risk
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Risk Premium
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Average value of squared deviations from mean. A measure of volatility.
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Variance
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Square root of variance. Another measure of volatility
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Standard Deviation
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Strategy designed to reduse risk by spreading the portfolio across many investments.
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Diversification
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Risk factors affecting only that firm. Also called diversifiable risk.
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Unique Risk
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Economywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.
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Market Risk
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Portfolio of all assets in the economy. In practice a broad stock market index is used to represent the market.
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Market Portfolio
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Sensitivity of a stock's return to the return on the market portfolio.
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Beta
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Risk premium of market portfolio. Difference between market return and return on risk-free Treasury Bills.
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Market Risk Premium
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Theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium.
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Capital Asset Pricing Model (CAPM)
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Relationship between expected reurn and beta.
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Security Market Line
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Expected rate of reurn demanded by investors in a company, determined by the average risk of the company's securities.
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Company Cost of Capital
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Minimum acceptable expected rate of return on a project given its risk.
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Project Cost of Capital
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The mix of long-term debt and equity financing.
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Capital Structure
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Expected rate of return on a portfolio of all the firm's secrities, adjusted for tax savings due to interest payments.
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Weighted-Average Cost of Capital (WACC)
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Cash flow that is not required for investment in fixed assets or working capital and is therefore available to investors.
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Free Cash Flow
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Stock that has been repurchased by the compnay and held in its treasury.
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Treasury Stock
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Shares that have been issued by the company.
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Issued Shared
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Shares that have been issued by the compnay and are held by investors.
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Outstanding Shares
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Maximum number of shares that the company is permitted to issue.
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Authirized Share Capital
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Value of security shown in the company's accounts.
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Par Value
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Difference between issue price and par value of stock. Also called capital surplus.
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Additional Paid-In Capital
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Earnings not paid out as dividends.
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Retained Earnings
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Voting system in which each director is voted on separately.
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Majority Voting
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Voting system in which all votes that one shareholders allowed to cast can be cast for one candidate for the board of directors.
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Cumulative Voting
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Takeover attempt in which outsiders compete with management for shareholders' votes.
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Proxy Contest
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Stock that takes priority over common stock in regard to dividends.
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Preferred Stock
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Book value of common stockholders' equity plus preferred stock.
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Net Worth
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Preferred stock paying dividends that vary with short-term interest rates.
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Floating-Rate Preferred
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Benchmark interest rate charged by banks.
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Prime Rate
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Debt with more than 1 year remaining
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Funded Debt
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Fund established to retire debt before maturity.
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Sinking Fund
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Bond that may be repurchased by firm before maturity at specified call price.
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Callable Bond
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Debt that may be repaid in bankruptcy only after senior debt is paid.
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Subordinate Debt
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Debt that has first claim on specified collateral in the event of default.
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Secured Debt
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Dollars held on deposit in a bank outside the United States.
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Eurodollars
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Bond that is marketed internationally.
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Eurobond
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Sale of securities to a limited number of investors without a public offering.
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Private Placement
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Restriction on a firm to protect bondholders.
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Protective Covenant
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Long-term rental agreement.
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Lease
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Right to buy shares from a company at a stipulated price before a set date.
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Warrant
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Bond that the holder may exchange for a specified amount of another security.
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Convertible Bond
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Cash reinvested in the firm: depreciation plus earnings not paid out as dividends.
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Internally Generated Funds.
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Difference between the cash companies need and the amount generated internally.
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Financial Deficit.
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The mix of long-term debt and equity financing.
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Capital Structure
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Process of changing the firm's capital structure without changing its real assets.
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Restructuring
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The value of a firm is unaffected by its capital structure.
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MM's Proposition I (Debt-Irrelevance Proposition)
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Risk in firm's operating income.
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Operating Risk (Business Risk)
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Debt Financing to amplify the effects of changes in operating income on the reurns to stockholders.
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Financial Leverage
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Risk to shareholders resulting from the use of debt.
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Financial Risk
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The required rate fo return on the equity increases as the firm's debt-equity ratio increases.
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MM's Proposition II
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Tax savings resulting from deductibility of interest payments.
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Interest Tax Shield
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Costs arising from bankruptcy or distorted business decisions before bankruptcy.
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Costs of Financial Distress
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Debt levels are chosen to balance interest tax shields against the costs of financial distress.
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Trade-Off Theory
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Agreement between firm and lender requiring the firm to fulfill certain conditions to safeguard the loan.
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Loan Covenant
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Firms prefer to issue debt rather than equity if internal finance is insufficient.
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Pecking Order Theory
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Ready access to cash or debt financing.
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Financial Slack
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Agreement between a company and its creditors establishing the steps the company must take to avoid bankruptcy.
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Workout
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The reorganization or liquidation of a firm that cannot pay its debts.
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Bankruptcy
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Sale of bankrupt firm's assets.
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Liquidation
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Restructuring of financial claims on failing firm to allow it to keep operating.
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Reorganization
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Payment of cash by the firm to its shareholders.
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Cash Dividend
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Without dividend. Buyer of a stock after the ex-dividend date does not receive the most recently declared dividend.
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Ex-Dividend
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Distribution of additional shares to a firm's stockholders
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Stock Dividend
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Issue of additional shares to firm's stockholders.
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Stock Split
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Firm buys back stock from its shareholders.
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Stock Repurchase
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Dividend increases send good news about future cash flow and earnings. Dividend cuts send bad news.
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Information Content of Dividends
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Under ideal conditions, the value of the firm is unaffected by dividend policy
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MM's Dividend-Irrelevance Proposition
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Dividend increases send good news about future cash flow and earnings. Dividend cuts send bad news.
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Information Content of Dividends
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Under ideal conditions, the value of the firm is unaffected by dividend policy
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MM's Dividend-Irrelevance Proposition
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