Financial Management

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Proprietorship...

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is an unincorporated business owned by one individual

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Partnership...

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is a legal arrangement between two or more people who decide to do business together

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Corporation...

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is a legal entity created by a state, and it is separate and distinct from its owners and managers

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S-Corporation...

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is a special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or partnership rather than as a corporation

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Stockholder wealth maximization...

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is the primary goal for managerial decisions; considers the risk and timing associated with expected earnings per share in order to maximize the price of the firm’s common stock

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Intrinsic Value...

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is 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

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Market price...

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is the stock value based on perceived but possibly incorrect information as seen by the marginal investor

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Corporate raider...

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is an individual who targets a corporation for takeover because it is undervalued

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Hostile takeover...

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is the acquisition of a company over the opposition of its management

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CEO...

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Chief Executive Officer heads the management team, and ideally is separate from chairman of the board

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COO..

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Chief Operating Officer is in charge of the firm’s actual operations

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CFO...

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Chief Financial Officer is responsible for the accounting system, raising capital, and evaluating major investment decisions and the effectiveness of operations

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Annual Report...

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is 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

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Balance sheet...

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is a statement of the firm’s financial position at a specific point in time

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Income statement...

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is a report summarizing the firm’s revenues and expenses during an accounting period, generally a quarter or a year

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Statement of cash flows...

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is a statement reporting the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period

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Statement of retained earnings...

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is a statement reporting how much of the firm’s earning were retained in the business rather 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

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Common stockholders' equity, or net worth...

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is the capital supplied by common stockholders: common stock, paid-in capital, retained earnings, and certain reserves

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Retained earnings...

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is the portion of the firm’s earnings that has been saved rather than paid out as dividends

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Net working capital...

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is current assets minus current liabilities. It is frequently used measure of liquidity

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Depreciation...

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is the charge to reflect the cost of assets used up in the production process. Depreciation is not a cash outlay

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Tangible assets...

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are physical assets such as plant and equipment

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EBITDA...

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is earnings before interest, taxes, depreciation, and amortization

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Term structure of interest rates...

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is the relationship between bond yields and maturities

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"Normal" yield curve...

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is an upward-sloping yield curve

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Inverted "abnormal" yield curve...

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is a downward-sloping yield curve

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Humped yield curve...

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is a yield curve where interest rates on medium-term maturities are higher than rates on both short- and long-term maturities

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Time line...

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is an important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows

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Compounding...

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is the arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied

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Discounting...

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is the process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding

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Simple interest...

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occurs when interest is not earned on interest

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Compound interest...

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occurs when interest is earned on prior periods’ interest

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Annuity...

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is a series of equal payments of fixed intervals for a specified number of periods

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Ordinary (deferred) annuity...

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is an annuity whose payments occur at the end of each period

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Annuity due...

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is an annuity whose payments occur at the beginning of each period

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Uneven cash flows...

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is a series of cash flows where the amount varies from one period to the next

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Payment...

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is the term that designates equal cash flows coming at regular intervals

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Cash flow (CFt)...

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is the term that designates a cash flow that’s not part of an annuity

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Annual compounding...

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is the arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year

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Semiannual compounding...

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is the arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year

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Trend analysis...

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is an analysis of a firm’s financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition

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Benchmarking...

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is the process of comparing a particular company with a group of “benchmark” companies

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Current ratio...

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is calculated by dividing current assets by current liabilities. It indicates the extent to which current

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Market/Book (M/B) Ratio...

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is the ratio of a stock’s market price to its book value

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"Window dressing" techniques...

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is employed by firms to make their financial statements look better than they really are

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Money markets...

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are the financial markets in which funds are borrowed or loaned for short periods (less than one year)

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Capital markets...

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are the financial markets for stocks and for intermediate-or-long-term debt (one year or longer)

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Primary markets...

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are markets in which corporations raise capital by issuing new securities

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Secondary markets...

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are markets in which securities and other financial assets are traded among investors after they have been issued by corporations

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Private markets...

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are markets in which transactions are worked out directly between two parties

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Public markets...

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are markets in which standardized contracts are traded on organized exchanges

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Derivative...

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is any financial asset whose value is derived from the value of some other “underlying” asset

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Mutual funds...

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are organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification

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Money market funds...

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are mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts

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Closely held corporation...

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is a corporation that is owned by a few individuals who are typically associated with the firm’s management

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Publicly held corporation...

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is a corporation that is owned by a relatively large number of individuals who are not actively involved in its management

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Going public...

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is the act of selling stock to the public at large by a closely held corporation or its principal stockholders

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Initial Public Offering (IPO) market...

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is the market for stocks of companies that are in the process of going public

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Bond...

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is a long-term debt instrument

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Treasury bonds...

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are bonds issued by the federal government, sometimes referred to as government bonds

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Corporate bonds...

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are bonds issued by corporations

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Municipal bonds...

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are bonds issued by state and local governments

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Foreign bonds...

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are bonds issued by either foreign governments or foreign corporations

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Coupon payment...

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is the specified number of dollars of interest paid each year

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Coupon interest rate...

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is the stated annual interest rate on a bond

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Discount bond...

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is a bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate

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Premium bond...

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is a bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate

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Investment-grade bonds...

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are bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds

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Junk bond...

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is a high-risk, high-yield bond

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Proxy...

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is a document giving one person the authority to act for another, typically the power to vote shares of common stock

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Proxy fight...

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is an attempt by a person or group to gain control of a firm by getting its stockholders to grant that person or group the authority to vote their shares to replace the current management

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Takeover...

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is an action whereby a person or group succeeds in ousting a firm’s management and taking control of the company

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Preemptive right...

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is a provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock (or convertible securities)