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595 Cards in this Set

  • Front
  • Back
Abnormal Return
The additional return above the expected return from a factor model. (=Alpha)
Absolute Return
The amount distributed to the limited partners of a fund, expressed as multiple of each dollar contributed by the partners: e.g., over the life of a fund that has $100M in committed capital, the limited partners receive $200M back. The absolute return of this fund = $200M/$100M = 2. (=Investment multiple, = Realization ratio, =Value multiple)
Absolute Valuation
Any method of valuation that relies on estimates and forecasts made by the analyst. Discounted cash flow analysis is an example of absolute valuation. (See also Relative Valuation).
Accounting Profit
A dividend that adds to the redemption value of preferred stock, but is not actually paid until a deemed liquidation event.
Adjusted Conversion Price
The conversion price after anti-dilution protections have taken effect (See also Adjusted Conversion rate).
Adjusted Conversion Rate
The Conversion rate after anti-dilution protections have taken effect (See also Adjusted Conversion Price).
Alpha
English pronunciation of the Greek letter, α (=Abnormal Return).
American Option
An option that can be exercised any time on or before the exercise date.
Amoritized Loan
A loan that is repaid in equal payments over its life.
Amortization: A noncash charge similar to depreciation except that it is used to write off the costs of intangible assets
Amortization Schedule
A table showing precisely how a loan will be repaid. It gives the required payment on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment.
Angel Investor
A wealthy individual who invests in young, growth companies. An angel differs from a venture capitalist because the former is using her own money.
Annual Percentage Rate (APR)
The periodic rate times the number of periods per year
Annual Report
A report 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.
Annualized Return
An asset return expressed on a per-year basis
Annuity: A series of equally payments at fixed intervals for a specified number of periods
Applied Research
Research intended to translate scientific findings into practical uses (Basic Research, Development).
Arms Race
A Strategic situation where all parties have an incentive to escalate some activity, even though all parties would be better off if they could agree not to escalate.
As-if Conversion
A feature of PCP and PCPC stock, where the stock receives its redemption value and also is entitled to participate in the upside “as-if” it had been converted to common stock.
At the Money:
An option where the strike price is exactly the same as the current value of the underlying security.
Balance Sheet
A statement of the firm’s financial position at a specific point in time.
Barriers to entry
An obstacle, either legal or economic, that prevents or slows down competition in some market.
Base Tree
A binomial tree showing the possible price paths for the underlying security in an option-pricing problem (See also Option tree).
Basic Earning Power (BEP) Ratio
This ratio indicates the ability of the firm’s assets to generate operating income; calculated by dividing EBIT by total assets.
Benchmarking
The process of comparing a particular company with a group of “benchmark companies”
Beta
English pronunciation of the Greek letter, β. W/in the Capital Asset Pricing Model (CAPM), the beta of an asset is the factor loading of the asset on the market portfolio. In this model, beta is the regression coefficient on an asset’s excess returns when it is regressed on the market premium. W/in multi-factor models, beta is sometimes used generically to refer to the loading on any factor.
Basic Du Pont Equation
A formula that shows that the rate of return on assets can be found as the product of the profit margin times the total assets turnover.
Binary Call Option
An option that pays a fixed amount if the price of an underlying asset is higher than a preset strike price on an exercise date.
Binomial Trees
A decision tree with exactly two branches from each risk node and a foxed time period for each branch. Binomial trees are commonly used to value options.
Black-Scholes Formula
A valuation formula for European call options.
Binomial option pricing model
Option pricing model based upon the assumption that stock prices can move to only one of two levels at each point in time.
Book Value
Accounting estimate of the value of an asset or liability, usually from the balance sheet of the firm.
Bottom-up Betas
Beta computed by taking a weighted average of the betas of the businesses that a firm is in. These betas, in turn, are estimated by looking at firms that operate only or primarily in each of these businesses.
Building the Book
Process of polling institutional investors prior to pricing an initial offering, to gauge the extent of the demand for an issue.
Burn Rate
The speed with which a company is using up it cash.
Call market
A market where an auctioneer (or a market maker) holds an auction at certain times in the trading day and sets a market-clearing price, based upon the orders grouped together at that time.
Call Option
Gives the holder the right, but not the obligation, to purchase an underlying security at a strike price.
Callable Bonds (debt)
Debt (bonds), where the borrower has the right to pay the bonds back at any time. The option to pay back will generally be used if interest rates decrease.
Cap
The maximum interest rate on a floating rate bond.
Capital Call
When the general partner of a fund requests capital from the limited partners. (=Drawdown, =Takedown)
Capital Asset Pricing Model (CAPM)
Model that expresses the expected return of an asset as a function of the risk-free rate, the market premium and beta,
Capital Expenses
Expenses that are expected to generate benefits over multiple periods. Accounting rules generally require that these expenses be depreciated or amortized over the multiple periods.
Capital Lease
The lessee assumes some of the risks of ownership and enjoys some of the benefits. Consequently, the lease, when signed, is recognized both as an asset and as a liability (for the lease payments) on the balance sheet.
Capital Rationing
Situation that occurs when a firm is unable to invest in projects that earn returns greater than the hurdle rates because it has limited capital (either because of internal or external constraints).
Capitalization Table
A table prepared as part of the term sheet that lists the stock ownership of all investors, both before and after the current transaction.
Capped call
A call where the payoff is restricted on the upside. If the price rises above this level, the call owner does not get any additional payoff.
Carried Interest
The fund profits paid to the general partner. (= Carry)
Carried Interest Basis
(= carry basis) Fund profits are defined as total proceeds minus the carried interest basis. Typically, this basis is set to be either the committed capital or the investment capital of the fund.
Cash Distribution
The distribution of cash to limited partners. The alternative to a cash distribution is an in-kind distribution.
Cash Flow Statement
A statement reporting the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.
Catch-up Provision
When limited partners receive a hurdle return, the general partner may have a catch-up provision that allows them to receive a share greater than carry% for some range of profits after the hurdle return is achieved.
Cash flow to equity investors
Cash flows generated by the asset after all expenses and taxes, and also after payments due on the debt.
Cash flow to the firm
Cash flows generated by the asset for both the equity investor and the lender. This cash flow is before debt payments but after operating expenses and taxes.
Cash slack
Combination of excess cash and limited project opportunities in a firm.
Cash Flow Return On Investment (CFROI)
Internal rate of return on the existing investments of the firm, estimated in real terms, using the original investment in the assets, their remaining life and expected cash flows.
Catastrophe Bond
A bond that allows for the suspension of coupon payments and/or the reduction of principal, in the event of a specified catastrophe.
Certainty Equivalent (cash flow)
A guaranteed cash flow that you would agree to accept in exchange for a much larger and riskier cash flow.
Chapter 11
Legal process governing bankruptcy proceedings.
Charter
Legal document, setting out the main rules of corporate governance. Key provisions from the charter are included as part of the term sheet (= Certificate of incorporation)
Clawback
If carried interest is received before the entire carried interest basis and hurdle returns have been paid, and if later proceeds are insufficient to reach these thresholds then general partners may be subject to a clawback, where some of the earlier carried interest must be transferred to the limited partners.
Clientele Effect
Clustering of stockholders in companies with dividend policies that match their preferences for dividends.
Cliff Investing
When all remaining options (or stock) becomes vested at the same time.
Clinical Trials
Drug tests in humans for safety and efficacy. (= Human trials)
Closed
In raising a fund, general partners ask limited partners to commit to providing capital. When the general partners have reached some desirable threshold of committed capital, they publicly announce that the fund is closed. Despite the finality of this term , some funds close multiple time, each time announcing a new level of committed capital.
Collateral Bond
Bond secured with marketable securities
Combination leases
A lease that shares characteristics with both operating and capital leases.
Commercial Paper
Short term notes issued by corporations to raise funds.
Commitment Period
The time, usually the first five years of life, during which the fund is permitted to make investments in new portfolio companies (= Investment Period)
Committed Capital
The total amount of capital promised to the fund by the limited partners.
Common Equity: (=Net Worth)
The capital supplied by common stockholders: common stock, paid-in capital, retained earnings, and occasionally, certain reserves.
Common Stock
Equity claims that are paid last upon a liquidation of the company.
Commodity bond
A bond whose coupon rate is tied to commodity prices.
Comparables Analysis
The valuation of an asset by using data on similar assets. (= Multiples analysis, =Method of multiples, =Relative Valuation)
Competitive Advantage
Anything that allows a company to charge prices above marginal costs.
Competitive Risk
Risk that the cash flows on projects will vary from expectations because of actions taken by competitors.
Compounding
The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied.
Compound Interest
Interest that is paid on principal and on any interest accrued from previous periods.
Compound Options
An option on an option.
Compound Return
A periodic return calculated by multiplying the subperiod returns.
Compounding
The process of converting cash flows today into cash flows in the future.
Concentration banking
System where firms pick banks around the country to process checks, allowing for the faster clearing of checks
Consol bond
A bond with a fixed coupon rate that has no maturity (infinite life).
Consolidation (in mergers):
A combination of two firms where a new firm is created after the merger, and both the acquiring firm and target firm stockholders receive stock in this firm.
Consolidation (in accounting statements)
The accounting approach used to show the income from ownership of securities in another firm, where it is a majority, active investment. The balance sheets of the two are merged and presented as one balance sheet. The income statements, likewise, represent the combined income statements of the two firms.
Contingent liabilities
Potential liabilities that will be incurred under certain contingencies, as is the case, for instance, when a firm is the defendant in a lawsuit.
Contingent Value Rights
Securities where holders receive the right to sell the shares in the firm at a fixed price in the future; it is a long term put option on the equity of the firm.
Continuing value: present value of the expected cash flows from continuing an existing investment through the end of its life.
Continuous market
A market where prices are determined through the trading day as buyers and sellers submit their orders.
Continuous price process
Price process where price changes becoming infinitesimally small as time periods become smaller.
Contributed Capital
At any given time in the life of the fund, contributed capital is equal to the sum of invested capital plus all prior management fees.
Conversion premium
Excess of convertible bond market value over its conversion value.
Convertible bond
A bond that can be converted into a pre-determined number of shares of the common stock, at the discretion of the bondholder
conversion ratio (in convertible bond)
Number of shares of stock for which a convertible bond may be exchanged.
Convertible preferred stock
Preferred stock that can be converted into common equity, at the discretion of the preferred stockholder. equity that can be either be turned in for its redemption valuer or converted to common stock.
Corporate Venture Capital
VC investment by corporations. Although traditional VC seeks to maximize financial returns, corporate venture capital often mixes financial and strategic goals.
Cost of capital
Weighted average of the costs of the different sources of financing used by a firm. The risk-adjusted discount rate for an investment project, In an equilibrium model like the CAPM, the cost of capital is equal to the expected return.
Cost of debt (pre-tax)
Interest rate, including a default spread, that a borrower has to pay to borrow money.
Cost of debt (after-tax)
Interest rate, including a default spread, that a borrower has to pay to borrow money, adjusted for the tax deductibility of interest.
Cost of equity
The rate of return that equity investors in a firm expect to make on their investment, given its riskiness.
Cumulative abnormal (excess) returns (cars)
Difference between the actual return on an investment and the expected return, given market returns and stock's risk, cumulated over a period surrounding an event (such as an earnings announcement).
Cumulative dividends
Dividends that accrue if not paid,
Current assets
Short-term assets of the firm, including inventory of both raw material and finished goods, receivables (summarizing moneys owed to the firm) and cash.
Current PE
Ratio of price per share to earnings per share in most recent financial year.
Current Ratio
This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
Days Sales Outstanding (DSO)
(=Average Collection Period (ACP)) This ratio is calculated by dividing accounts receivable by average sales per day; it indicates the average length of time the firm must wait after making a sale before it receives cash.
Deal Flow
The investment opportunities available to a VC. In general, the better a VC’s reputatioin, the better quality their deal flow is
Debentures
Unsecured bonds issued by firms with a maturity greater than 15 years.
Debt Exchangeable for Common Stock (decs)
Debt that can be exchanged for common stock, with the conversion rate depending upon the stock price.
Debt
Any financing vehicle that has a contractual claim on the cash flows and assets of the firm, creates tax deductible payments, has a fixed life, and has priority claims on the cash flows in both operating periods and in bankruptcy.
Debt Ratio
The ratio of total debt to total assets. It measures the percentage of funds provided by creditors.
Default Risk
Risk that a promised cash flow on a bond or loan will not be delivered.
Default spread
Premium over the riskless rate that you would pay (if you were a borrower) because of default risk.
Deemed Liquidation Event
(=Liquidation) An event where certain preferred stock rights come into force. These events are carefully defined in the term sheet. The most common triggers for a deemed liquidation event are when a portfolio company is purchased or shut down.
Deferred tax asset
Asset created when companies pay more in taxes than the taxes they report in the financial statements.
Depreciation
Accounting adjustments to the book value of an asset for the aging and subsequent loss of earning power on it. Applies when you have a capital expenditure. The charge to reflect the cost of assets used up in the production process. Depreciation is not a cash outlay.
Demand Registration Rights
Rights that allow preferred stock holders to demand that their shares be sold in a registered transaction.
Derivative Assets
Assets whose value is completely dependent on the value of other assets.
Direct cost of bankruptcy
Costs include the legal and administrative costs, once a firm declares bankruptcy, as well as the present value effects of delays in paying out the cash flows.
Discounting
The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding
Disbursement float
Lag between when a check is written and the time it is cleared, when the firm is writing the check.
Discount rate
the rate used to move cash flows from the future to the present, in discounting, or from the present to the future, in compounding. The rate that equates a $1 today with the expected value of $1 in some future period.
Discounted Cash Flow (DCF) Analysis
A method that values an asset as the sum of the discounted value of all cash flows produced by that asset. DCF analysis a form of absolute valuation.
Discounting
the process of converting cash flows in the future to cash flows today.
The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding
Diversifiable Risk
Risk that has only a negligible impact on the whole economy (e.g.the risk that any specific house will burn down is diversifiable risk).
Divestiture Value
(= Idiosyncratic Risk)
Value of an asset to the highest potential bidder for it.
Divestiture
Sale of asset, assets or division of a firm to third party.
Dividend capture (arbitrage)
Strategy of buying stock before the ex-dividend day, selling it after it goes ex-dividend and collecting the dividend
Dividend declaration date
Date on which the board of directors declares the dollar dividend that will be paid for that quarter (or period).
Dividend payment date
Date on which dividends are paid to stockholders.
Dividend payout ratio
Ratio of dividends to net income (or dividends per share to earnings per share).
Dividend Preference
The restriction that dividends cannot be paid to common stock holders unless they are first paid to preferred stock holders.
Dividend Yield
Ratio of dividends, usually annualized, to current stock price.
Down-and-out option
A call option that ceases to exist if the underlying asset rises above a certain price.
Domestic Beta
The regression coefficient on an asset’s excess returns when it is regressed on the market premium form its own country.
Domestic CAPM
A CAPM that uses the market premium form any one country. In contrast, the global CAPM uses the global market premium.
Down Round
In terms sheets, the technical definition that round Y is a down round typically requires that the conversion price for preferred stock in round Y is lower than the conversion price for preferred stock in Round X, where X <Y. More generally, we can also think of a down round occurring if the implied valuation for series X after round Y is lower than LP Cost of series X.
Down Round
In terms sheets, the technical definition that round Y is a down round typically requires that the conversion price for preferred stock in round Y is lower than the conversion price for preferred stock in Round X, where X <Y. More generally, we can also think of a down round occurring if the implied valuation for series X after round Y is lower than LP Cost of series X.
Dragalong
A right of preferred stock holders to force other investors to sell their stake in the company, provided that the preferred stock holder has found a buyer for all shares at the same price. (=Tagalong, =Right of first offer, =Right of first refusal, = Transfer restrictions).
Dual currency bond
Bond with some cash flows (eg. Coupons) in one currency and other cash flows (eg. Principal) in another.
Due Diligence
Careful study of all aspects of a potential investment
Duration
Weighted maturity of all the cash flows on an asset or liability
Early Stage
he definitions of early stage, midstage (=Expansion stage), and later stage are imprecise. The NVCA defines it as a stage “provides financing to companies completing development where products are mostly in testing or pilot production.
Earnings
(= Net Income, = Net Profits) The difference b/t revenue and expenses.
Earnings Before Interest and Taxes (EBIT)
Earnings plus interest expense plus taxes.
EBITA
Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITA Coverage Ratio
A ratio whose numerator includes all cash flows available to meet fixed financial charges and whose denominator includes all fixed financial charges
Economic Exposure
Effect of exchange rate changes on the value of a firm with exposure to foreign currencies.
Economic order quantity (EOQ)
The order quantity that minimizes the total costs of new orders and the carrying cost of inventory.
Economic Value Added (EVA)
Measure of dollar surplus value created by a firm or project. It is defined to be the difference between the return on capital and the cost of capital multiplied by the capital invested. Excess of NOPAT over capital costs.
Effective (Equivalent) Annual Rate (EFF% or EAR)
The annual rate of interest actually being earned, as opposed to the quoted rate. Also called the “equivalent annual rate.”
Efficient Frontier
The line connecting efficient portfolios, i.e. Portfolios that yield the highest expected return for each level of risk (standard deviation).
Enterprise Value
Market value of debt and equity of a firm, net of cash. The market value of all securities issued by a company.
Equity approach
The accounting approach used to show the income from ownership of securities in another firm, where it is a minority, active investment. A proportional share (based upon ownership proportion) of the net income and losses made by the firm in which the investment was made, is used to adjust the acquisition cost.
Equity Carve Out (ECO)
Action where a firm separates out assets or a division, creates shares with claims on these assets, and sells them to the public. Firm generally retains control of the carved out asset.
Equity Market Value
(= market cap, = market capitalization)
Equity Risk
Measure of deviation of actual cash flows from expected cash flows.
Equity
Any financing vehicle that has a residual claim on the firm, does not create a tax advantage from its payments, has an infinite life, does not have priority in bankruptcy, and provides management control to the owner.
Eurobonds
Bonds issued in the local currency but offered in foreign markets. Eurodollar and Euroyen bonds are examples.
Eurodollar Bonds
Bonds denominated in U.S. dollars and offered to investors globally
European options
An option that can be exercised only at maturity.
European Call
Gives the holder the right, but not the obligation, to purchase an underlying security at a strike price on a specific expiration date.
European Put
Gives the holder the right, but not the obligation, to sell an underlying security at a strike price on a specific expiration date.
Euroyen bonds
Bonds denominated in Japanese Yen and offered to investors globally.
Excess return (abnormal return)
Difference between the actual returns on an investment and the expected return, given market returns and investment's risk.
Ex-dividend date
Date by which investors have to have bought the stock in order to receive the dividend
Exercise Price (Strike Price)
Price at which the underlying asset in an option can be bought (if it is a call) or sold (if it is a put).
Exit value
Estimated value of a private firm in a year in which the owners plan to sell it to someone else or to take it public.
Ex-rights price
Stock price without the rights attached to the stock, in a rights offering.
External Financing
Cash flows raised outside the firm whether from private sources or from financial markets.
Expected Return
From a mathematical perspective, the expected return on an investment is computed by multiplying each possible return by the probability of that return. In an equilibrium model like the CAPM, the expected return is equal to the cost of capital.
Expiration Date
The last possible date that an option can be exercised.
Expropriation
A fancy way to say “stealing.” Minority investors must always be on guard for subtle ways that managers and majority investors can expropriate resources of the company. (=Investor Expropriation, =Self-dealing, =Tunneling)
Factor beta
A measure of the exposure of an asset to a specified macroeconomic factor (such as inflation or interest rates) or an unspecified market factor.
Fama-French Model (FFM)
A multifactor model with three factors related to the market premium, the size of the company, and the growth prospects of the company.
FIFO
An inventory valuation method, where the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year.
Financing expenses
Expenses arising from the non-equity financing used to raise capital for the business
Financial Leverage
the use of debt financing. Has 3 important implications:
(1) By raising funds through, debt, stockholders can control a firm with a limited amount of equity investment.
(2) Creditors look to the equity, or owner-supplied funds, to provide a margin of safety, so the higher the proportion of the total capital provided by stockholders, the less the risk faced by creditors
(3) If the firm earns more on its assets than the interest rate it pays on debt, then using debt “leverages” or magnifies, the return on equity (ROE).
Financial Options
Options on financial assets. In contrast, real options are options on real assets.
Financial Leverage
The use of debt financing
Financing Round: (=Round)
A discrete event where a young company receives capital from investors. Financing rounds are often referred to sequentially as first round (= Series A), second round (= Series B), etc.
Firm
any business large or small, privately run or publicly traded, and engaged in any kind of operation - manufacturing, retail or service.
Firm-specific risk
Risk that affects one or a few firms, and is thus risk that can be diversified away in a portfolio
Fixed (exchange) rates
Exchange rate set and backed up by a government, rather than by demand and supply.
Fixed assets
Long term and tangible assets of the firm, such as plant, equipment, land and buildings.
Fixed Assets Turnover Ratio
The ratio of sales to net fixed assets. It measures how effectively the firm uses its plant and equipment.
Fixed-rate bond
Bond with a coupon rate that is fixed for the life of the bond.
Float
Lag between when the check is written and the time it is cleared.
Floating (exchange) rates
Exchange rates determined by demand and supply for the currency, and thus change over time.
Floating rate bond
Bond with a coupon rate that is reset each period, depending upon a specified market interest rate (prime or LIBOR).
Floor
The minimum interest rate on a floating rate bond.
Forward contracts
A contract to buy or sell an asset, security or currency in the future at a fixed price (specified at the time of the contract)
Forward P/E
Ratio of price per share to expected earnings per share in next financial year.
Forward price (rate)
The price or rate quoted in a forward contract.
Free Cash Flow
The cash flow actually available for distribution to all investors (stockholders and debt holders) after the company has made all the investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.
Free cash flow to equity
cash left over after operating expenses, net debt payments and reinvestments.
Free cash flow to the firm
Cash flow left over after operating expenses, taxes and reinvestment needs, but before any debt payments (interest or principal payments).
Free cash flows (Jensen)
Cash flows from operations over which managers have discretionary spending power. The cash flow actually available for distribution to all investors (stockholders and debtholders) after the company has made all the investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.
Full-Ratchet Anti-dilution
A strong version of anti-dilution protection, where the adjusted conversion price is the lowest price paid by any later-round investor.
Fully Diluted Basis
Any computation that assumes the conversion of all preferred stock and the exercise of all options.
Fully Diluted Share Count
The total number of shares outstanding assuming the conversion of all preferred stock and the exercise of all options
Fund-of-Fund (FOF)
A fund that makes investments in other funds, rather than making investment directly in portfolio companies.
Future Value (FV)
The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate
Futures contract
Like a forward contract, it is an agreement to buy or sell an underlying asset at a specified time in the future. However, it differs from a forward because it is usually traded, requires daily settlement of differences and has no default risk.
Golden parachute
A provision in an employment contract that allows for the payment of a lump-sum or cash flows over a period, if the manager covered by the contract loses his or her job in a takeover.
Goodwill
The difference between the market value of an acquired firm and the book value of its assets; arises only when purchase accounting is used in an acquisition.
Gordon growth model
Stable-growth dividend discount model, where the value of a stock is the present value of expected dividends, growing at a constant rate forever.
Greenmail
Buying out the existing stake of a hostile acquirer in the firm, generally at a price much greater than the price paid by the acquirer. In return, the acquirer usually agrees not to go through with the takeover or buy additional stock in the firm for a period of time (standstill agreement).
Gross Investment
The gross amount added to a company’s capital stock in a period.
Gross Investment Multiple
(=Gross Value Multiple(GVM)) The total value of all investments at exit, divided by investment capital.
Gross Return
A return calculated before subtracting management fees, carried interest, or any other investment costs.
Growing Annuity
A cash flow that occurs at regular interval and grows at a constant rate for a specified period of time.
Growing perpetuity
A cash flow that is expected to grow at a constant rate forever.
Growth assets
Investments yet to be made by the firm; often markets will incorporate their expectation of the value of these assets into the market value.
Historical (risk) premium
Difference between returns on risky investments (usually stocks) and riskless investments (usually government securities) over a specified past time period.
Historical Cost
The original price paid for an asset, when acquired, adjusted upwards for improvements made to the asset since purchase and downwards for the loss in value associated with the aging of the asset.
Historical Return
(=realized return) The past return for an asset fund, or manager.
Holder-of-Record Date
Date on which company closes its stock transfer books and makes up a list of the shareholders.
Hurdle Rate
a minimum acceptable rate of return on projects; used to determine whether to invest in a project or not.
Hurdle Returns
(=Preferred returns, =Priority Returns) A preset level of returns that the fund must pay to investors before the GP can begin to take any carried interest.
Hybrid securities
Securities that share some characteristics with debt and some with equity. Examples would be preferred stock and convertible debt.
Implied Premium
The premium estimated based upon the current level of stock prices and expected cash flows from buying stocks. The internal rate of return that would make the present value of the cash flows equal to today's stock prices is the expected return on equity. Subtracting out the riskless rate yields the implied premium.
Income bonds
Bond on which interest payments are due only if the firm has positive earnings.
Income statement
A statement which provides information on the revenues and expenses of the firm, and the resulting income made by the firm, during a period.
A report summarizing the firm’s revenues and expenses during an accounting period, generally a quarter or a year.
Incremental cash flows
Cash flows that arise as a consequence of a new investment. It is the difference between the cash flow a firm would have had without the new investment and the cash flow with the new investment.
Indirect costs of bankruptcy
Costs associated with the perception that a firm may go bankrupt - lost sales, drop in employee morale, tighter supplier credit.
Inflation rate
Change in purchasing power in a currency from period to period.
Inflation-indexed treasury bond
A government bond that guarantees a real interest rate, rather than a nominal rate.
In-process R&D
Portion of an acquired firm's value that is attributed to past research. This amount is usually written off right after the acquisition.
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.
Intangible Assets
Assets that do not have a physical presence but have value (either because they generate cash or can be sold). Examples would include assets like patents and trademarks as well as uniquely accounting assets such as goodwill that arise because of acquisitions made by the firm
In-Kind distributions
(=Stock distributions) The distribution of stock to limited partners. The alternative to an in-kind distribution is a cash distribution.
Interest rate parity
Equation that relates the differential between forward and spot rates to interest rates in the domestic and foreign market.
Internal equity
Cash flows generated by the existing assets of a firm that are reinvested back into the firm.
Internal rate of return (IRR)
Discount rate that makes the net present value zero. It can be considered a time-weighted, cash flow, rate of return on an investment.
Start with a stream of cash flows. Compute the Net Present Value (NPV) of these cash flows as a function of the discount rate. The discount rate that makes this NPV equal to zero is the IRR.
International Fisher Effect
Specifies the relationship between changes in exchange rates and differences in nominal interest rates in two countries.
In the money
If the price of an underlying asset is above (below) the strike price for a call (put) option, we say that option is in the money.
Inventory Turnover Ratio
Ratio is calculated by dividing sales by inventories.
Invested Capital
Any any point during the life of a fund, invested capital is equal to the total amount of capital that has already been invested in portfolio companies. For a fund that has reached the end of its life, invested capital is equal to investment capital.
Investment Rate (IR)
=Plowback ratio, =Reinvestment rate) The percentage of a company’s earnings that is reinvested into the capital stock of the company.
Investor Rights Agreement
The portion of the term sheet that lists any special rights of the investors.
Jump price process
Price process where price changes stay large even as the period gets shorter.
Knockout Option
An option that ceases to exist if the underlying asset reaches a certain price.
Kurtosis
Measure of the likelihood of large jumps in a distribution, captured in the tails of the distribution.
Leveraged Buyout
An acquisition of a firm by its own managers or a private entity, financed primarily with debt.
Leveraged Recapitalization
Using new debt to repurchase equity and increasing debt ratio substantially in the process.
Levered beta
Beta of a firm, reflecting its financial leverage. This will change as leverage changes.
LIFO Reserve
Difference in inventory valuation between FIFO and LIFO. Firms that choose the LIFO approach to value inventories have to specify in a this difference.
LIFO
An inventory valuation method where the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in inventory costs that closely approximate current costs.
Line of Credit
A financing arrangement, under which the firm can draw on only if it needs financing, up to the agreed limit.
Liquid Assets
An asset that can be converted to cash quickly without having to reduce the asset’s price very much.
Liquidating dividends
Dividends in excess of the retained earnings of a firm. This is viewed as return of capital in the firm and taxed differently.
Liquidation Preference
Describes the order in which different security holders are paid in the event of a liquidation.
Liquidation value
net cash flow that the firm will receive from selling an asset today.
Liquidity Ratios
Ratios that show the relationship of a firm’s cash and other current assets to its liabilities.
Lockbox system
System where customer checks are directed to a post office box, rather than to the firm
Lockup
An agreement between the underwriter of an IPO and the prior investors in the company that prevents these prior investors from selling any of their shares for some lockup period that follows the IPO.
Management Carve Out
At the time of exit, the portion of proceeds reserved for current management.
Major bracket investment bankers
Investment bankers in the top tier, based upon reputation and national focus.
Majority active investment
Categorization of ownership of securities by one firm in another firm are treated, if the securities represent more than 50% of the overall ownership of that firm.
Management buyouts
An acquisition of a publicly traded firm by its own managers.
Market Value Added (MVA)
The excess of the market value of equity over its book value.
Marginal investor
The investor or investors most likely to be involved in the next trade on the securities issued by a firm. Not necessarily the largest investor in the firm.
Marginal return on equity (capital)
Measures quality of marginal investments, rather than average investments. Computed as the change in income (net income or operating income) divided by the change in equity or capital invested.
Marginal tax rate
Tax rate on the last dollar of income (or the next dollar of income). Usually determined by the tax codes.
Market/Book (M/B) Ratio
he Ratio of a stock’s market price to its book value.
Market capitalization (market cap)
Market value of equity in a firm. For public companies, market cap is equal to the total market value (price per share times shares outstanding) of a company’s common stock.
Market conversion value
Current market value of the shares for which a convertible bond can be exchanged.
Market efficiency
A measure of how much the price of an asset deviates from a firm’s true value. The smaller and less persistent the deviations are, the more efficient a market is.
Market Risk
Risk that affects many or all investments in a market. This risk cannot be diversified away in a portfolio.
Market Price
The stock value based on perceived but possibly incorrect information as seen by the marginal investor.
Market Value
Estimate of how much an asset would be worth if sold in the market today. If the asset is a traded asset, this is obtained by looking at the last traded price.
Market Value Ratios
A set of ratios that relate the firm’s stock price to its earnings, cash flow, and book value per share.
Markowitz Portfolios
The set of portfolios, composed entirely of risky assets, that yield the highest expected returns for each level of risk (standard deviation).
Merger
A combination of two firms where the boards of directors of two firms agree to combine and seek stockholder approval for the combination. In most cases, at least 50% of the shareholders of the target and the bidding firm have to agree to the merger. The target firm ceases to exist and becomes part of the acquiring firm.
Mezzanine bracket
Smaller investment banks that operate nationally.
Miller-Orr Model
Model for estimating an optimal cash balance, given the cost of selling securities and the interest rate that can be earned on marketable securities, for firms with uncertain cash inflows and outflows.
Minority Interest
The share of the firm that is owned by other investors, when one firm owns a majority, active interest in another firm (more than 50%). The minority interest is shown on the liability side of the balance sheet. Shows up only in the event of consolidation.
Minority, Active Investment
Categorization of ownership of securities by one firm in another firm are treated, if the securities represent between 20% and 50% of the overall ownership of that firm. Usually get accounted for using the equity approach.
Modified internal rate of return (MIRR)
Internal rate of return estimated with the assumption that intermediate cash flows are reinvested at the cost of equity or capital instead of the internal rate of return.
Mortgage bond
A bond secured by real property, such as land or buildings.
Mutually exclusive (projects)
A set of projects where only one of the set can be accepted by a firm.
Equivalent Annuities
Annuity equivalent of the NPV of a multi-year project.
Near-cash investments
Investments that earn a market return, with little or no risk, and can be quickly converted into cash.
Negative pledge clause
Clause in a bond issue that specifies that the bond is backed only by the earning power of the firm, rather than specific assets.
Net Cash Flow
The actual net cash, as opposed to accounting profit (net income), that a firm generates during a specified period.
Net debt payments
Difference between debt repaid and new debt issued by a firm during a period.
Net float
Difference between the disbursement and processing float.
Net lease
A capital lease where the lessor is not obligated to pay insurance and taxes on the asset, leaving these obligations up to the lessee; the lessee consequently reduces the lease payments.
Net Operating Working Capital (NOWC)
Operating working capital less accounts payable and accruals. It is the working capital acquired with investor-supplied funds.
Net operating losses (nols)
Accumulated losses over time that can be used to offset income and save taxes in future periods.
Net Operating Profit After Taxes (NOPAT)
The profit a company would generate if it had no debt and held only operating assets.
Net Operating Working Capital (NOWC)
Operating working capital less accounts payable and accurals. It is the working capital acquired with investor-supplied funds.
Net present value (NPV)
Sum of the present values of all of the cash flows on an investment, netted against the initial investment.
Net Working Capital
Defined as current assets minus current liabilities. It is a frequently used measure of liquidity.
Net present value profile
A graph that records the net present value as the discount rate changes.
Nominal cash flow
A cash flow in nominal terms, or an expected cash flow that includes the effects of inflation (higher prices for both inputs and output).
Nominal interest rate
Interest rate on a bond that incorporates expected inflation.
Non-cash working capital
Difference between non-cash current assets and non-debt current liabilities.
Notes
Unsecured bonds issued by firms with maturity less than 15 years.
Offering price
Price of a stock at the initial public offering.
Open market repurchase
Stock repurchase where firms buy shares in securities markets at the prevailing market price, and do not have to offer the premiums required for tender offers.
Operating expenses
Expenses that provide benefits only for the current period
Operating exposure
Economic exposure that measures the effects of exchange rate changes on expected future cash flows and discount rates, and, thus, on total value.
Operating lease
The lessor (or owner of the asset) transfers only the right to use the property to the lessee. At the end of the lease period, the lessee returns the property to the lessor. The lease expense is treated as an operating expense in the income statement and the lease does not affect the balance sheet.
Operating leverage
A measure of the proportion of the costs that are fixed costs; the higher the proportion the greater the operating leverage.
Opportunity costs
Costs associated with the use of resources that a firm may already own. The rate of return you could earn on an alternative investment of similar risk.
Option delta
Number of units of the underlying asset that are needed to create the replicating portfolio for an option.
Option
Right to buy or sell an underlying asset at a fixed price sometime during the option's life (American option) or at the end of the option life (European option).
Original-issue deep discount bond
Bond with a coupon rate that is much lower than the market interest rate at the time of the issue. This bond will be priced well below par.
Participating Convertible Preferred Stock (PCP)
Convertible preferred stock that is entitled to a liquidation return, which includes both its redemption value and as-if conversion into common stock. PCP is forced to convert if there is no qualified public offering.
Participating Convertible Preferred Stock with cap (PCPC)
Convertible preferred stock that is entitled to a liquidation return, which includes both its redemption value and as-if conversion into common stock, but the liquidation return is capped even if there is no qualified public offering. PCPC is forced to convert if there is no qualified public offering.
Pastor -Stambaugh Model (PSM)
A multifactor model with four factors related to the market premium, the size of the company, the growth prospects of the company, and the liquidity risk of the company.
Payback
Period of time over which the initial investment on a project will be recovered.
PEG ratio
Ratio of PE ratio to expected growth rate in earnings.
Perpetuity
A stream of constant cash flows that occur at regular intervals forever.
Piggback registration rights
Rights that allow preferred stock holders to “piggback” and sell their shares in an already scheduled registration transaction. Piggyback registration rights are weaker than demand registration rights, b/c the former cannot create a new transaction, but must rely on other investors obtaining a registered transaction.
Poison pills
Securities, the rights or cash flows on which are triggered by hostile takeovers. The objective is to make it difficult and costly to acquire control
Pooling accounting
Accounting approach for acquisitions where the book values of the two firm involved in the acquisition are added up, and the market value of the acquisition is not shown on the balance sheet.
Preferred stock
Security that pays a fixed dividend, which is usually not tax deductible, and has an infinite life; usually has no or limited voting rights;
Security which a fixed dollar dividend that is usually not tax deductible to the firm; if the firm does not have the cash to pay the dividend, the dividend is cumulated and paid in a period when there are sufficient earnings.
Present Value (PV)
The value today of a future cash flow or series of cash flows.
Price/Book value
Ratio of price per share to book value of equity per share.
Price/Cash Flow Ratio
The ratio of the price per share divided by cash flow per share; shows the dollar amount investors will pay for $1 of cash flow.
Price/Earnings ratio (P/E)
Ratio of price per share to earnings per share; shows the dollar amount investors will pay for $1 of current earnings.
Price/sales ratio (P/S)
Ratio of price per share to sales per share.
Principal exchange linked bonds (PERLS)
Bonds where coupons and principal are payable in US dollars, but the amount of the payment is determined by the exchange rate between the US dollar and a foreign currency.
Private Equity
Equity provided by private investors to companies, often with the intent of taking the company from public to private status;
In its broadest meaning, private equity includes all investments that cannot be resold in public markets. In its more narrow meaning, private equity refers to a class of investments, managed by private equity firms, which make investments in VC, leveraged buyouts, mezzanine, or distress
Private Placement
An arrangement where securities are sold directly to one or a few investors.
Privately negotiated repurchases
Stock repurchase negotiated with a stockholder who owns a substantial percentage of the shares.
Profitability Ratios
A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
Profit Margin on Sales
This ratio measures net income per dollar of sales; it is calculated by dividing net income by sales.
Probit
Statistical technique used to estimate probability of an event occurring.
Processing float
Lag between when the check is written and the time it is cleared, when the customer is writing the check to the firm.
Product cannibalization
The effect that the introduction of a new product may have on a firm’s existing product sales.
Profitability index
Ratio of net present value to initial investment in a project. Often used when a firm faces capital rationing.
Project Risk
Risk that affects the cash flows of a project will differ from expectations, due to estimation errors or unanticipated events.
Purchase accounting
Accounting approach for acquisitions where the market value paid for the acquired firm is shown on the balance sheet, and goodwill, which is the difference between the book value and market value of the acquired firm, is shown as an asset.
Purchase of Assets
An action where one firm acquires the assets of another, though a formal vote by the shareholders of the firm being acquired is still needed.
Purchasing power parity
Equation that relates changes in exchange rates to differences in inflation. Based upon the assumption that a specific basket of goods should sell for the same price across different countries
Pure play
Beta or other input estimated for a project by looking at the betas of firms that are involved only or primarily in similar investments.
Put-call parity
Arbitrage relationship governing the prices of a call and put option, with the same strike price, same exercise price and on the same underlying asset.
Puttable bonds
Debt (bonds), where bond buyers are allowed to put their bonds back to the firm and receive face value, in the event of an occurrence like a leveraged buyout.
Qualified Institutional Buyers (QIBs)
Large institutional investors, who are permitted to purchases securities under exceptions to the SEC’s registration rules. The main class of QIBs are institutions that manage more than $100M.
Qualified Public Offerings
An IPO above a minimum size and above a minimum per-share price. These minimums are specified in the term sheet.
Quick Ratio (Acid Test)
This ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities.
Rainbow options
An option that is exposed to more than one type of uncertainty.
Real cash flow
A cash flow that is corrected for the loss of buying power over time, associated with inflation.
Real interest rate
Interest rate on a bond after taking out the expected inflation component.
Real interest rate
The compensation, in real goods, that has to be offered to get lenders to postpone consumption and allow you to use their savings.
Realized Return
(1) generic for all finance, synonym for historical returns. (2) Specialized for private equity, refers to a fund’s returns from all exited investments.
Nominal interest rate
The compensation that has to be offered to lenders to induce them to lend you money; the nominal component captures expected inflation.
Real options
An option on a real asset, as opposed to a financial asset.
Recapitalization
Changing financing mix by using new equity to retire debt or new debt to reduce equity.
Redeemable Preferred Stock (RP)
Preferred stock that pays a redemption value on liquidation, but does not offer the holder the option of conversion to common stock
Redemption
The act of turning in preferred stock in return for redemption value.
Redemption Rights
The right of preferred stock holders to redeem their stock outside of a deemed liquidation event. The right is usually less powerful in practice than it is on paper b/c preferred stock holder, as equity investors, do not have the power to force a company into bankruptcy if the company cannot pay the redemption.
Red herring
Preliminary prospectus issued by a firm going public, while the registration is being reviewed by the SEC.
Registration rights
As specified in the terms sheet, registration rights give the holders the power to sell some of their shares in a registered transaction. These rights come in several different strengths, w/ demand registration rights being the strongest.
Regular dividend
Dividend paid at regular intervals to stockholders.
Reinvestment rate
Proportion of after-tax operating income reinvested back into the firm.
Replicating portfolio
A portfolio of the underlying asset and the riskless asset that has the same cash flows as an option.
A combination of risk-free bonds and risky assets that provides exactly the same payoffs as a derivative.
Repo rate
Implied interest rate in a repurchase agreement, calculated based upon the difference between the price at which a security is bought and the price at which it will be sold back.
Repurchase agreement (repo)
he sale of a security, with an agreement that the security will be bought back at a specified price at the end of the agreement period
Repurchase tender offer
Stock repurchase where firm specifies a price at which it will buy back shares, the number of shares it intends to repurchase, and the period of time for which it will keep the offer open.
Restricted Stock
Stock that cannot be sold in a public market, except through a registered transaction or through a Rule 144 exception to the registration rules. Once a stock has been sold in a registered ir Rule 144 transaction, it becomes unrestricted stock.
Restricted Covenants
Contractual terms in limited partnership agreements that restrict the activities of the general partner.
Retained Earnings
That portion of the firm’s earnings that has been saved rather than paid out as dividends
Retained Earnings Statement
A statement reporting how much of the firm’s earnings were retained in the business rather than paid as dividends. The balance sheet number reported for retained earnings is the sum of the annual retained earnings for each year of the firm’s history.
Return on Common Equity (ROE)
The ratio of net income to common equity; measures the rate if return on common stockholders’ investment.
Return on Total Assets (ROA)
The ratio of the net income to total assets
Reverse repurchase agreement (reverse repo)
The buying of a security, with an agreement that the security will be soldback at a specified price at the end of the agreement period.
Rights offering
Offering where existing investors in the firm are given the right to buy additional shares, in proportion to their current holdings, at a price generally much lower than the current market price (subscription price).
Rights-on price
Stock price with the rights attached to the stock, in a rights offering.
Risk-Free Rate
the rate of return on securities that have no systematic risk. In the U.S., federal gov’t debt is often considered to be risk free.
Riskless rate: (=Risk-Free Rate)
Expected rate of return on an asset with guaranteed returns.
Road shows
Stage in the public offering process that the investment banker and issuing firm will present information to prospective investors in a series of presentations.
S-3 Registration Rights
A type of demand registration right that only takes effect once the company is already public. S-3 rights are weaker than regular demand registration rights b/c the former cannot be used to force a private company to go public.
Safety inventory
Extra inventory cover the demand while an order is being replenished
Scenario analysis
Analysis where earnings, cash flows or other variables can be forecast under a variety of different scenarios, some positive and some negative.
Sector risk
Risk that the cash flows on projects will vary from expectations because of events that affect an entire sector.
Secured debt
Bonds or debt with priority in claims on the assets of the firm, in the event of bankruptcy.
Seed-money venture capital
Venture capital provided to start-up firms that want to test a concept or develop a new product.
Serial bonds
Bonds where a percentage of the outstanding bonds mature each year, and the maturity is specified on the serial bond.
Simple Interest
Occurs when interest is not earned on interest
Sinking funds
A fund into which a fixed amount is set aside each year to repay outstanding bonds when they come due.
Skewness
Bias towards positive or negative returns in a distribution.
Special dividend
Dividends paid in addition to regular dividend infrequently.
Spin off
Action that separates out assets or a division and creates new shares with claims on this portion of the business. Existing stockholders in the firm receive these shares in proportion to their original holdings. Firm usually gives up control over the assets.
Split off
Action that separates out assets or a division and creates new shares with claims on this portion of the business. Existing stockholders are given the option to exchange their parent company stock for these new shares.
Split up
Action where firm splits into different business lines, distributes shares in these business lines to the original stockholders in proportion to their original ownership in the firm, and then ceases to exist.
Spot rate
Current market rate; Often used in the context of commodities or foreign currency.
Standard deviation
Measure of the squared deviations of actual returns from the expected returns. This is the square root of the variance.
Stand-by guarantees
Underwriting agreement where the investment banker provides back-up support, in case the actual price falls below the offering price.
Standstill agreement
An agreement entered into between a hostile acquirer and a firm, where the hostile acquirer (in return for a payment) agrees not to buy additional stock in the firm for a period of time.
Start-up venture capital
Venture capital that allows firms that have established products and concepts to develop and market them.
Statement of cash flows
A statement which specifies the sources of cash to the firm from both operations and new financing, and the uses of this cash, during a period.
Step-down floating rate bond
A floating rate bond where the spread over the market interest rate decreases over time instead of remaining fixed over the bond’s life.
Step-up floating rate bond
A floating rate bond where the spread over the market interest rate increases over time instead of remaining fixed over the bond’s life.
Stock dividends
Dividend that takes the form of additional stock (in proportion to existing holdings) in the firm.
Stock split
Action where additional shares are given to each stockholder in the firm, in proportion to holdings in the firm.
Straight line depreciation
A depreciation method where an equal amount of the asset is written off each year, over an estimated lifetime, to reflect its aging.
Strike Price (Exercise Price)
Price at which the underlying asset in an option can be bought (if it is a call) or sold (if it is a put).
Subordinated debentures
Unsecured bond with claims against assets that are subordinated to the claims of other lenders.
Subscription price
Price at which a rights offering is made by a firm.
Super-majority amendment
an amendment requiring an acquirer to acquire more than the 51% that would normally be required to gain control of a firm.
Synergy
Increase in value arising from the combination of two firms, projects or assets that would not arise if the firms, projects or assets were independently run.
Synthetic rating
Bond rating estimated using a financial ratio or ratios for a firm. This is in contrast to an actual rating that is usually provided by a ratings agency.
Target Multiple of Money
The average multiple of money that a VC expects in a successful exit. The target multiple of money is a key input in the venture capital method of valuation.
Tender offer
A solicitation where one firm offers to buy the outstanding stock of the other firm at a specific price and communicates this offer in advertisements and mailings to stockholders.
Target Return
Similar to the target multiple of money that a VC expects in a successful exit. The target multiple of money is a key input in the venture capital method of valuation.
Term Sheet
The summary document describing the key terms of a proposed VC/PE investment.
Terminal price (value)
Expected value of an asset at the end of forecast period. For instance, if you forecast cash flows for 10 years, the terminal value is the value at the end of the 10th year.
Time line
A line depicting the magnitude and timing of cash flows on an investment.
Times-Interest-Earned (TIE) Ratio
the ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firm’s ability to meet its annual interest payments.
Tobin’s Q
Ratio of firm value to replacement cost of the assets owned by the firm.
Tombstone advertisement
Advertisement containing details of an initial public offering, the name of the lead investment banker, and the names of other investment bankers involved in the issue.
Total Assets Turnover Ratio
his ratio is calculated by dividing sales by total assets. It measures the turnover of all the firm’s assets.
Tracking stock
Stock issued on a division of a firm. The owner is entitled to the earnings and cash flows of the division, and the stock trades on that basis.
Generally, the parent company continues to maintain full control over the division.
Trailing PE
Ratio of price per share to earnings per share over the most recent four quarters.
Tranche
Generically, w/in finance a tranche refers to a slice of the capital structure of a company or security offering. Within VC, a tranche refers to a slice of a financing round, with different tranches delivered to the portfolio company at different times.
Transactions Exposure
Economic exposure faced by a firm because of exchange rate movements which affect cash inflows and outflows on transactions entered into by the firm.
Translation exposure
Effect of exchange rate changes on the current income statement and the balance sheet of a firm with exposure to foreign currencies.
Treasury bills
Short-term obligations issued by the U.S. government.
Treasury stock approach
Approach for dealing with options in valuation, where the exercise value of the options is added to the value of the equity in the firm, and the total amount is divided by the number of shares outstanding, including those covered by the options.
Trend Analysis
An analysis of a firm’s financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.
Trust preferred stock
Preferred stock, structured in such a way that the fixed dividend that is tax deductible to the firm.
Underwriter
Financial intermediary that takes possession of an asset or a risk. In capital markets, this possession is of a very short duration, with the assets transferred to the ultimate investors. In these markets, the underwriters’s main job is to identify and sell to these ultimate investors.
Underwriting guarantee
Guarantee of a fixed price (offering price) offered by an investment banker in a public offering of securities.
Unlevered beta
The beta of a firm, under the scenario that it is all equity-financed. It is determined by the businesses that the firm is in, and the operating leverage it maintains in these businesses. Can be computed from the regression beta (top-down) or by taking a weighted average of the betas of the different businesses (bottom-up).

A beta estimated from a factor model regression for an unlevered asset. the equity in an all-equity company is an unlever asset.
Unsecured bonds
Bonds with the lowest claim on the cash flows and assets of the firm.
Up-and-out option
A put option that ceases to exist if the underlying asset falls below a certain price.
Value ratio
Ratio of PBV Ratio to return on equity of a firm.
Value/sales ratio (VS)
Ratio of value per share to sales per share.
Variance: Measure of the squared deviations of actual returns from the expected returns.
Venture capital method
Value estimated by applying a price-earnings multiple to the earnings of the private firm are forecast in a future year, when the company can be expected to go public.
Venture Capital
Capital used by specialized financial intermediaries for investment in private companies with the intention of helping these companies to grow.
Venture capitalist
An entity that provides equity financing to small and often risky businesses in return for a share of the ownership of the firm.
Warrants
Securities where holders receive the right to buy shares in the company at a fixed price in the future; it is a long term call option on the equity of the firm.
Spot Markets
The markets in which assets are bought or sold for “on-the-spot” delivery
Futures Markets
he markets in which participants agree today to buy or sell an asset at some future date.
Money Markets
The financial markets in which funds are borrowed or loaned for short periods (less than one year)
Capital Markets
The financial markets for stocks and for intermediate- or long-term debt (one year or longer).
Primary Markets
Markets in which corporations raise capital by issuing new securities.
Secondary Markets
Markets in which securities and other financial assets are traded among investors after they been issued by corporations.
Private Markets
Markets in which transactions are worked out directly between two parties.
Public Markets
Markets in which standardized contracts are traded on organized exchanges.
Real Risk-Free Rate of Interest
The rate of interest that would exist on default-free U.S. Treasury securities if no inflation were expected.
Nominal (Quoted) Risk-Free Rate
The rate of interest on a security that is free of all risk; Risk Free Rate is proxied by the T-Bill rate or the T-Bond rate. It includes an inflation premium.
Inflation Premium (IP)
A premium equal to expected inflation that investors add to the real risk-free rate of return.
Default Risk Premiun (DRP)
The difference b/t the interest rate on a U.S. Treasury bond and a corporate bond of equity maturity and marketability.
Liquidity Premium (LP)
A premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice and at close to its “fair market value.”
Interest Rate Risk
The risk of capital losses to which investors are exposed b/c of changing interest rates.
Maturity Risk Premium (MRP)
A premium that reflects interest rate risk.
Reinvestment Rate Risk: The risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested.
Term Structure of Interest Rates
The relationship b/t bond yields and maturities.
Yield Curve
A graph showing the relationship b/t bond yields and maturities.
“Normal” Yield Curve
An upward-sloping yield curve.
Inverted (“Abnormal”) Yield Curve
A download-sloping yield curve.
Humped Yield Curve
A yield curve where interest rates on medium-term maturities are higher than rates on both short- and long-term maturities.
Pure Expectations Theory
A theory that states that the shape of the yield curve depends on investors’ expectations about future interest rates.
Bond
A long-term debt instrument.
Par Value
The face value of a bond.
Coupon Payment
The specified number of dollars of interest paid each year.
Coupon Interest Rate
The stated annual interest rate on a bond.
Floating-Rate Bond
A bond whose interest rate fluctuates with shifts in the general level of interest rates.
Zero coupon Bond
A bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation.
Original Issue Discount (OID) Bond
Any bond originally offered at a price below its par value.
Maturity Date
A specified date on which the par value of a bond must be repaid.
Original Maturity
The number of years to maturity at the time a bond is issued.
Call Provision
A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.
Sinking Fund Provision
A provision in a bond contract that requires the issuer to retire a portion of the bond issue each year.
Convertible Bond
A bond that is exchangeable, at the option of the holder, for the issuing firm’s common stock.
Warrant
A long-term option to buy a stated number of shares of common stock at a specified price.
Putable Bond
A bond with provisions that allows its investor to sell it back to the company prior to maturity at a pre-arranged price.
Income Bond
A bond that pays interest only if it is earned.
Indexed (Purchasing Power) Bond
A bond that has interest payments based on an inflation index so as to protect the holder from inflation.
Discount Bond
A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate.
Premium Bond
A bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate.
Yield to Maturity (YTM)
The rate of return earned on a bond if it is held to maturity.
Yield to Call (YTC)
The rate of return earned on a bond if it is called before its maturity date.
Current Yield
The annual interest payment on a bond divided by the bond’s current price.
Interest Rate (Price) Risk
The risk of a decline in a bond’s price due to an increase in interest rates.
Reinvestment Rate Risk
The risk that a decline in interest rates will lead to a decline in income form a bond portfolio.
Investment Horizon
The period of time an investor plans to hold a particular investment.
Indenture
A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds.

A formal agreement b/t the issuer and bondholders.
Debenture
A long-term bond that is not secured by a mortgage on specific property.
Subordinated Debenture:
A bond having a claim on assets only after the senior debt gas been paid off in the event of liquidation.
Investment-Grade Bonds
Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds.
Junk Bond
A high-risk, high-yield bond.
Risk Premium
The difference b/t the expected rate of return on a given risky asset and that on a less risky asset.
Expected Return on a Portfolio
The weighted average of the expected returns on the assets held in the portfolio.
Realized Rate of Return
The return that was actually earned during some past period. The actual return usually turns out to be different from the expected return except for riskless assets.
Correlation
The tendency of two variables to move together.
Correlation Coefficient,
A measure of the degree of relationship b/t two variables
Market Portfolio
A portfolio consisting of all stocks.
Diversifiable Risk
That part of a security’s risk associated with random events; it can be eliminated by proper diversification.
Market Risk
That part of a security’s risk that cannot be eliminated by diversification.
Capital Asset Pricing Model (CAPM)
model based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification.
Relevant Risk
The risk of a security that cannot be diversified away. This is the risk that affects portfolio risk and thus is relevant to a rational investor.
Beta Coefficient
A metric that shows the extent to which a given stock’s returns move up and down with the stock market. Beta thus measures market risk.
Market Risk Premium, RPm
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.
Security Market Line (SML) Equation
An equation that shows the relationship b/t risk as measured by beta and the required rates of return on individual securities.
Preemptive Right
A provision in the corporate charter or bylaws that gives common stockholders that right to purchase on a pro rata basis new issues of common stock (or convertible securities).
Classified Stock
Common stock that is given a special designation, such as Class A, Class B, and so forth, to meet special needs of the company.
Founders’ Shares
Stock owned by the firm’s founders that has sole voting rights but restricted dividends for a specified number of years.
Intrinsic Value
The value of an asset that, in the mind of a particular investor, is justified by the facts; Intrinsic Value may be different from the asset’s current market price.
Growth Rate
The expected rate of growth in dividends per share
Required Rate of Return
The minimum rate of return on a common stock that a stockholder considers acceptable.
Expected Rate of Return
The rate of return on a common stock that a stockholder expects to receive in the future.
Actual Realized Rate of Return
The rate of return on a common stock actually received by stockholders in some past period.
Dividend Yield
The expected dividend divided by the current price of a share of stock.
Capital Gains Yield
The capital gain during a given year divided by the beginning price.
Expected Total Return
The sum of the expected dividend yield and the expected capital gains yield
Constant Growth (Gordon) Model
Used to find the value of a constant growth stock.
Total Company or Corporate Valuation Model
A valuation model used as an alternative to the dividend growth model to determine the value of a firm, especially one with no history of dividends or a division of a larger firm. This model first calculates the firm’s free cash flows and then finds their present value to determine the firm’s value.
Marginal Investor
A representative investor whose actions reflect the beliefs of those people who are currently trading a stock. It is the marginal investor who determines a stock’s price.
Capital Component
One of the types of capital used by firms to raise funds.
Target (Optimal) Capital Structure
The percentage of debt, preferred stock, and common equity that will maximize the firm’s stock price.
Weighted Average Cost of Capital (WACC)
A weighted average of the component costs of debt, preferred stock, and common equity.
After-Tax Cost of Debt
The relevant cost of new debt, taking into account the tax deductiblity of interest; used to calculate the WACC.
Cost of Preferred Stock, Rp
The rate of return investors require on the firm’s preferred stock. Rp is calculated as the preferred dividend,, Dp, divided by the current price, Pp
Cost of Retained Earnings, Rs
The rate of return required by stockholders on firm’s common stock.
Cost of New Common Stock, Re
The cost of external equity; based on the cost of retained earnings, but increased for flotation costs.
Flotation
The percentage cost of issuing new common stock.
Retained Earnings Breakpoint
The amount of capital raised beyond which new common stock must be issued.
Capital Budgeting
The process of planning expenditures on assets whose cash flows are expected to extend beyond one year.
Strategic Business Plan
A long-run plan that outlines in broad terms the firm’s basic strategy for the next 5 to 10 years.
Net Present Value (NPV) Method
A method of ranking investment proposals using the NPV, which is equal to the present value of future net cash flows, discounted at the cost of capital.
Internal Rate of Return (IRR)
The discount rate that forces a project’s NPV to equal zero.
Crossover Rate
The cost of capital at which the NPV profiles of two projects cross and, thus, at which the projects’ NPVs are equal.
Modified IRR (MIRR)
The discount rate at which the present value of a project’s cost is equal to the present value of its terminal value, where the terminal value is found as the sum of the future values of the cash inflows, compounded at the firm’s cost of capital.
Payback Period
The length of time required for an investment’s net revenues to cover its cost.
Discounted Payback
The length of time required for an investment’s cash flows, discounted at the investment’s cost of capital, to cover its cost.
Sunk Cost
A cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.
Opportunity Costs
The return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project.
Externality
An effect on the firm or the environment that is not reflected in the project’s cash flows.
Cannibalization Effect
The situation when a new project reduces cash flows that the firm would otherwise have had.
Market/Beta Risk
That part of a project;s risk that cannot be eliminated by diversification; it is measured by the project’s beta coefficient.
Risk-Adjusted Cost of Capital
The cost of capital appropriate for a given project, given the riskiness of that project. The greater the risk, the higher the cost of capital.
Sensitivity Analysis
A risk analysis technique in which key variables are changes one at a time and the resulting changes in the NPV are observed.
Base-Case NPV
The NPV when sales and other input variables are set equal to their most likely (or base-case)values.
Monte Carlo Simulation
A risk analysis technique in which probable future events are simulated on a computer, generating estimated rates of return and risk indexes.
Real Option
The right but not the obligation to take some action in the future.
Option Value
The difference b/t the expected NPVs w/ and w/o the relevant option. It is the value that is not accounted for in a traditional NPV analysis. A positive option value expands the firm’s opportunities.
Optimal Capital Budget
The annual investment in long-term assets that maximizes the firm’s value.
Capital Rationing
The situation where a firm can raise only a specified, limited amount of capital regardless of how many good projects it has.
Optimal Capital Structure
The firms’s capital structure that maximizes its stock price.
Target Capital Structure
The mix of debt, preferred stock, and common equity with which the firm plans to raise capital.
Business Risk
The riskiness inherent in the firm’s operations if it uses no debt.
Operating Leverage
The extent to which fixed costs are used in a firm’s operations.
Operating Breakeven
The output quantity at which EBIT = 0.
Financial Risk
An increase in stockholders’ risk, over and above the firm’s basic business risk, resulting from the use of financial leverage.
Financial Leverage
The extent to which fixed-income securities (debt and preferred stock) are used in a firm’s capital structure.
Unlevered Beta
The firm’s beta coefficient if it has no debt.
Trade-Off Theory
The capital structure theory that states firms trade off the tax benefits of debt financing against problems caused by potential bankruptcy.
Target Payout Ratio
The target percentage of net income paid out as cash dividends.
Optimal Dividend Policy
The dividend policy that strikes a balance b/t current dividends and future growth and maximizes the firm’s stock price.
Low-Regular-Dividend Plus-Extras
the policy of announcing a low, regular dividend that can be maintained no matter what and then, when times are good, paying a designated “extra” dividend.
Declaration Date
The date on which a firm’s directors issue a statement declaring a dividend.
Holder-of-Record Date
If the company lists the stockholder as an owner on this date, then the stockholder receives the dividend.
Ex-Dividend Date
The date on which the right to the current dividend no longer accompanies a stock; it is usually two business days prior to the holder-of-record date.
Payment Date
The date on which a firm actually mails dividends checks.
Dividend Reinvestment Plan (DRIP)
A plan that enables a stockholders to automatically reinvest dividends received back into the stock of the paying firm.
Working Capital
All short-term, or current, asset - cash, marketable securities, inventories, and accounts receivable.
Net Working Capital
Current assets minus all current liabilities.
Net Operating Working Capital
Current assets minus non-interest-bearing current liabilities.
Cash Conversion Cycle
The length of time funds are tied up in working capital, or the length of time b/t paying in working capital and collecting cash from the sale of the working capital.
Inventory Conversion Period
The average time required to convert raw materials into finished goods and then to sell them.
Average Collection Period (ACP)
The average length of time required to convert the firm’s receivables into cash, that, is, to collect cash following a sale.
Payables Deferral Period
The average length of time b/t the purchase of materials and labor and the payment of cash for them.
Permanent Current Assets
Current assets that a firm must carry even at the trough of its cycles.
Temporary Current Assets
Current assets that fluctuate with seasonal or cyclical variations in sales.
Current Asset Financing Policy
The way current assets are financed.
Cash Budget
A table that shows cash receipts, disbursements, and balances over some period.
Target Cash Balance
The desired cash balance that a firm plans to maintain in order to conduct business.
Account Receivables
A balance due from a customer.
Credit Policy
A set of rules that include the firm’s credit period, discounts, credit standards, and collection procedures offered.
Credit Period
The length of time customers have to pay for purchases.
Credit Terms
Statement of the credit period and any discount offered.
Aging Schedule
A report showing how long accounts receivable have been outstanding.
Trade Credit
Debit arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer.
Costly Trade Credit
Credit taken in excess of free trade credit, whose cost is equal to the discount lost.
Stretching Accounts Payable
The practice of deliberately paying late.
Promissory Note
A document specifying the terms and conditions of a loan, including the amount, interest rate, and repayment schedule.
Line of Credit
An arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
Revolving Credit Agreement
A formal, committed line of credit extended by a bank or other lending institution.
Prime Rate
A published interest rate charged by commercial banks to large, strong borrowers.
Regular/ Simple Interest
The situation when interest is paid monthly.
Add-On Interest: Interest that is calculated and added to funds received to determine the face amount of an installment loan.
Add-On Interest
Interest that is calculated and added to funds received to determine the face amount of an installment loan.
Commercial Paper
Unsecured, short -term promissory notes of large firms, usually issued in denominations of $100,000 or more having an interest rate somewhat below the prime rate.
Accruals
Continually recurring short-term liabilities, especially accrued wages and accrued taxes.
Spontaneous Funds
Funds that are generated spontaneously as the firm expands.
Secured Loan
A loan backed by collateral, often inventories or accounts receivable.
Capital Intensity Ratio
The amount of assets required per dollar of sales (A*/So).
Rule of 72
A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.
Fiscal Cliff
A combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective Dec. 31, 2012. The idea behind the fiscal cliff was that if the federal government allowed these two events to proceed as planned, they would have a detrimental effect on an already shaky economy, perhaps sending it back into an official recession as it cut household incomes, increased unemployment rates and undermined consumer and investor confidence. At the same time, it was predicted that going over the fiscal cliff would significantly reduce the federal budget deficit.
LBO
Leveraged Buyout
The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
Reclamation
The right to reclaim property in the event of non-payment, fraud or other irregularities. Reclamation in the financial context generally refers to the right to demand a repayment of monies paid if there has been a bad delivery of a stock or security. It may also refer to the right of the seller to reclaim the property and assume ownership if the buyer does not pay or fails to meet the terms of the purchase agreement. Reclamation also refers to the process of reconverting previously unusable lands such as closed mine sites or defunct industrial areas to productive uses.
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

Also known as "beta coefficient.
IRR
Internal Rate of Return

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 internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

IRR is sometimes referred to as "economic rate of return (ERR)."
10-K Wrap
A summary report of a company's annual performance that bundles the 10-K report required by the Securities and Exchange Commission (SEC) with additional commentary from the company, covering such things as the corporate vision, letter to shareholders and business overview among other topics. The 10-K wrap is often released instead of a traditional annual report and generally contains fewer images and comments from management.