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Financial Terminology

1) Proxy Flight: A proxy fight, also known as a proxy contest or proxy battle, refers to a
situation in which a group of shareholders in a company joins forces in an attempt to
oppose and vote out the current management or board of directors. In other words, a
proxy fight is a battle between shareholders and senior management for control over the
company.
2) Hostile takeover: A hostile takeover is the acquisition of one company (called the target
company) by another (called the acquirer) that is accomplished by going directly to the
company's shareholders or fighting to replace management to get the acquisition
approved.
3) Sunk Cost: A sunk cost refers to money that has already been spent and which cannot be
recovered. In business, the axiom that one has to "spend money to make money" is
reflected in the phenomenon of the sunk cost. A sunk cost differs from future costs that a
business may face, such as decisions about inventory purchase costs or product pricing
4) Opportunity Cost: A benefit, profit, or value of something that must be given up to
acquire or achieve something else. Since every resource (land, money, time, etc.) can be
put to alternative uses, every action, choice, or decision has an associated opportunity
cost
5) Incremental Cash flow: There are several components that must be identified when
looking at incremental cash flows: the initial outlay, cash flows from taking on the
project, terminal cost or value, and the scale and timing of the project. Incremental cash
flow is the net cash flow from all cash inflows and outflows over a specific time and
between two or more business choices
6) Cannibalization: An act or strategy in which a company introduces a new product into a
market where the same company's products are already well established.
7) Mutually Exclusive project: In capital budgeting, mutually-exclusive projects refer to a
set of projects out of which only one project can be selected for investment. A decision to
undertake one project from mutually exclusive projects excludes all other projects from
consideration. In case of mutually exclusive projects, the project with highest net present
value or the highest IRR or the lowest payback period is preferred
8) Capital Rationing: Capital rationing is the act of placing restrictions on the amount of
new investments or projects undertaken by a company. This is accomplished by imposing
a higher cost of capital for investment consideration or by setting a ceiling on specific
portions of a budget. Companies may want to implement capital rationing in situations
where past returns of an investment were lower than expected
9) Sensitivity and scenario Analysis:
 Sensitivity analysis is the study of how the uncertainty in the output of a mathematical
model or system (numerical or otherwise) can be divided and allocated to different
sources of uncertainty in its inputs and
Scenario Analysis: Scenario analysis is a process of examining and evaluating possible
events that could take place in the future by considering various feasible results or
outcomes
10) Free cash flow: Free cash flow represents the cash a company generates after cash
outflows to support operations and maintain its capital assets. It’s a measure of
profitability that excludes the non-cash expenses of the income statement and includes
spending on equipment and assets as well as changes in working capital.
11) NOPAT: Net operating profit after tax (NOPAT) is a company's potential cash earnings
if its capitalization were unleveraged — that is, if it had no debt.
12) WACC: The weighted average cost of capital (WACC) is a calculation of a firm's cost of
capital in which each category of capital is proportionately weighted. All sources of
capital, including common stock, preferred stock, bonds, and any other long-term debt,
are included in a WACC calculation.
13) Financial Distress: Financial distress is a condition in which a company or individual
cannot generate revenue or income because it is unable to meet or cannot pay its financial
obligations.
14) Asymmetric Information: Asymmetric information, also known as "information
failure," occurs when one party to an economic transaction possesses greater material
knowledge than the other party.
15) Agency Cost: An agency cost is a type of internal company expense which comes from
the actions of an agent acting on behalf of a principal.
16) Floatation Cost: Flotation costs are incurred by a publicly traded company when it
issues new securities, and includes expenses such as underwriting fees, legal fees and
registration fees.
17) Arbitrage: Arbitrage is the simultaneous purchase and sale of an asset to profit from an
imbalance in the price. It is a trade that profits by exploiting the price differences of
identical or similar financial instruments on different markets or in different forms.
Arbitrage exists as a result of market inefficiencies and would therefore not exist if all
markets were perfectly efficient.
18) Net Asset Value & Book Value:
The net asset value (NAV) represents the net value of an entity and is calculated as the
total value of the entity’s assets minus the total value of its liabilities.
Book Value is equal to its carrying value on the balance sheet, and companies calculate
it netting the asset against its accumulated depreciation. Book value is also the net asset
value of a company calculated as total assets minus intangible assets (patents, goodwill)
and liabilities.
19) Purchasing Power Parity: One popular macroeconomic analysis metric to compare
economic productivity and standards of living between countries is purchasing power
parity (PPP). PPP is an economic theory that compares different countries' currencies
through a "basket of goods" approach.