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Abnormal return (excess return): Difference between the actual returns on an investment and the expected return on that investment, given market returns and investment's risk.. Accelerated depreciation: A depreciation method where more of the asset is written off in earlier years and less in later years, over its lifetime, to reflect the aging of the asset. Accounting beta: Beta estimated using accounting earnings for a firm and accounting earnings for the market, rather than stock prices. Accrual accounting: Accounting approach, where the revenue from selling a good or service is recognized in the period in which the good is sold or the service is performed (in whole or substantially). A corresponding effort is made on the expense side to match expenses to revenues. Acquisition premium: Difference between the price paid to acquire a firm and the market price prior to the acquisition. Acquisition price: Price that will be paid by an acquiring firm for each of the target firm�s shares. Adjustable rate preferred stock: Preferred stock where the preferred dividend rate is pegged to an external index, such as the treasury bond rate. Agency costs: Costs arising from conflicts of interest between two stakeholders; examples would be managers & stockholders as well as stockholders & bondholders. Allocation: Process of distributing a cost that cannot be directly traced to a revenue center across different units, projects or divisions. American options: An option that can be exercised any time until maturity. Amortizable life: A period of time over which an intangible asset is written off. Annual percentage rate (APR): A rate that has to be cited with loans and mortgages in the United States. The rate incorporates an amortization of any fixed charges that have to be paid up front for the initiation of the loan. Annuity: A stream of constant cash flows that occur at regular intervals for a fixed period of time. Arbitrage position: A riskless position that yields a return that exceeds the riskfree rate.
Arbitrage principle: Assets that have identical cash flows cannot sell at different prices. Asset beta: The beta of the assets of investments of a firm, prior to financial leverage. Can be computed from the regression beta (top-down) or by taking a weighted average of the betas of the different businesses (bottom-up). Asset-backed borrowing: Bonds or debt secured by assets of any type. Mortgage bonds and collateral bonds are special cases. Assets-in-place: The existing investments of a firm. Bad debts: Portion of loans that cannot be collected (if you are the lender) or will not be paid (if you are the borrower). Balance sheet: A summary of the assets owned by a firm, the book value of these assets and the mix of financing, debt and equity, used to finance these assets at a point in time. Balloon payment bonds: Bonds where no principal repayment is made during the life of the bond but the entire principal is repaid at maturity. Bankrupt: The state in which a firm finds itself if it is unable to meet its contractual commitments. Barrier options: An option where the payoff on, and the life of, the option are a function of whether the underlying asset price reaches a certain level during a specified period. Baumol 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 certain cash inflows and outflows. Best efforts guarantee: Underwriting agreement on a security issue where the investment banker does not guarantee a fixed offering price. Beta: A measure of the exposure of an asset to risk that cannot be diversified away (also called market risk). It is standardized around 1. (Average = 1, Above average risk >1) 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.
Catastrophe bond: A bond that allows for the suspension of coupon payments and/or the reduction of principal. 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. 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). Accounting rules generally require that these expenses be depreciated or amortized over the multiple periods. Cashflow return on investment (CFROI): Internal rate of return on the existing investments of the firm. Capital expenses: Expenses that are expected to generate benefits over multiple periods. Chapter 11: Legal process governing bankruptcy proceedings.Building the book: Process of polling institutional investors prior to pricing an initial offering. their remaining life and expected cash flows. to gauge the extent of the demand for an issue. Cash slack: Combination of excess cash and limited project opportunities in a firm. in the event of a specified catastrophe. If the price rises above this level. 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. Capital lease: The lessee assumes some of the risks of ownership and enjoys some of the benefits. . This cash flow is before debt payments but after operating expenses and taxes. the call owner does not get any additional payoff. Certainty equivalent (cash flow): A guaranteed cash flow that you would agree to accept in exchange for a much larger and riskier cash flow. based upon the orders grouped together at that time. estimated in real terms. Consequently. the lease. Cash flow to the firm: Cash flows generated by the asset for both the equity investor and the lender. Cap: The maximum interest rate on a floating rate bond. is recognized both as an asset and as a liability (for the lease payments) on the balance sheet. and also after payments due on the debt. Cash flow to equity investors: Cash flows generated by the asset after all expenses and taxes. when signed. using the original investment in the assets. Capped call: A call where the payoff is restricted on the upside.
likewise. The balance sheets of the two are merged and presented as one balance sheet. Competitive risk: Risk that the cash flows on projects will vary from expectations because of actions taken by competitors. it is a long term put option on the equity of the firm. allowing for the faster clearing of checks Consol bond: A bond with a fixed coupon rate that has no maturity (infinite life). Compound options: An option on an option. Collateral bond: Bond secured with marketable securities Combination leases: A lease that shares characteristics with both operating and capital leases. The income statements. . Continuous market: A market where prices are determined through the trading day as buyers and sellers submit their orders. represent the combined income statements of the two firms. Continuous price process: Price process where price changes becoming infinitesimally small as time periods become smaller. active investment. Contingent value rights: Securities where holders receive the right to sell the shares in the firm at a fixed price in the future. Compounding: The process of converting cash flows today into cash flows in the future. for instance. Consolidation (in accounting statements): The accounting approach used to show the income from ownership of securities in another firm.Clientele effect: Clustering of stockholders in companies with dividend policies that match their preferences for dividends. Commodity bond: A bond whose coupon rate is tied to commodity prices. Commercial paper: Short term notes issued by corporations to raise funds. Continuing value: present value of the expected cash flows from continuing an existing investment through the end of its life. and both the acquiring firm and target firm stockholders receive stock in this firm. as is the case. Consolidation (in mergers): A combination of two firms where a new firm is created after the merger. where it is a majority. Concentration banking: System where firms pick banks around the country to process checks. when a firm is the defendant in a lawsuit. Contingent liabilities: Potential liabilities that will be incurred under certain contingencies.
Debt Exchangeable for Common Stock (decs). given its riskiness. and has priority claims on the cash flows in both operating periods and in bankruptcy. Default spread: Premium over the riskless rate that you would pay (if you were a borrower) because of default risk. . has a fixed life. with the conversion rate depending upon the stock price. receivables (summarizing moneys owed to the firm) and cash. that a borrower has to pay to borrow money. given market returns and stock's risk. Cost of equity: The rate of return that equity investors in a firm expect to make on their investment.: Debt that can be exchanged for common stock. Debt: Any financing vehicle that has a contractual claim on the cash flows and assets of the firm. including inventory of both raw material and finished goods. Cost of debt (pre-tax): Interest rate. including a default spread. Convertible bond: A bond that can be converted into a pre-determined number of shares of the common stock. creates tax deductible payments. that a borrower has to pay to borrow money. adjusted for the tax deductibility of interest. Cost of capital: Weighted average of the costs of the different sources of financing used by a firm. Debentures: Unsecured bonds issued by firms with a maturity greater than 15 years. Current assets: Short-term assets of the firm. cumulated over a period surrounding an event (such as an earnings announcement). 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. Default risk: Risk that a promised cash flow on a bond or loan will not be delivered.Conversion premium: Excess of convertible bond market value over its conversion value. Current PE: Ratio of price per share to earnings per share in most recent financial year. Cumulative abnormal (excess) returns (cars): Difference between the actual return on an investment and the expected return. Cost of debt (after-tax): Interest rate. including a default spread.
selling it after it goes ex-dividend and collecting the dividend. Duration: Weighted maturity of all the cash flows on an asset or liability. Applies when you have a capital expenditure. in compounding. Dual currency bond: Bond with some cash flows (eg. when the firm is writing the check. Direct cost of bankruptcy: Costs include the legal and administrative costs. Discount rate: the rate used to move cash flows from the future to the present. Depreciation: Accounting adjustments to the book value of an asset for the aging and subsequent loss of earning power on it. Disbursement float: Lag between when a check is written and the time it is cleared. Dividend yield: Ratio of dividends.Deferred tax asset: Asset created when companies pay more in taxes than the taxes they report in the financial statements. Discounting: the process of converting cash flows in the future to cash flows today. Dividend payment date: Date on which dividends are paid to stockholders. once a firm declares bankruptcy. assets or division of a firm to third party. Divestiture value: Value of an asset to the highest potential bidder for it. usually annualized. Down-and-out option: A call option that ceases to exist if the underlying asset rises above a certain price. Dividend payout ratio: Ratio of dividends to net income (or dividends per share to earnings per share). to current stock price. . Coupons) in one currency and other cash flows (eg. in discounting. Dividend declaration date: Date on which the board of directors declares the dollar dividend that will be paid for that quarter (or period). as well as the present value effects of delays in paying out the cash flows. Cost of bankruptcy (direct): Costs include the legal and administrative costs. Dividend capture (arbitrage): Strategy of buying stock before the ex-dividend day. or from the present to the future. Divestiture: Sale of asset. Principal) in another. once a firm declares bankruptcy. as well as the present value effects of delays in paying out the cash flows.
Portfolios that yield the highest expected return for each level of risk (standard deviation). Equity: Any financing vehicle that has a residual claim on the firm. Equity approach: The accounting approach used to show the income from ownership of securities in another firm. Enterprise value: Market value of debt and equity of a firm. 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 . Euroyen bonds: Bonds denominated in Japanese Yen and offered to investors globally. It is defined to be the difference between the return on capital and the cost of capital multiplied by the capital invested. European options: An option that can be exercised only at maturity. Economic order quantity (EOQ): The order quantity that minimizes the total costs of new orders and the carrying cost of inventory. net of cash.Economic exposure: Effect of exchange rate changes on the value of a firm with exposure to foreign currencies. Firm generally retains control of the carved out asset. A proportional share (based upon ownership proportion) of the net income and losses made by the firm in which the investment was made. and sells them to the public. i. Equity carve out (ECO): Action where a firm separates out assets or a division. Eurodollar bonds: Bonds denominated in U. does not create a tax advantage from its payments. creates shares with claims on these assets. does not have priority in bankruptcy. Economic Value Added (EVA): Measure of dollar surplus value created by a firm or project. where it is a minority. Eurobonds: Bonds issued in the local currency but offered in foreign markets. has an infinite life.S. active investment. Efficient Frontier: The line connecting efficient portfolios.e. and provides management control to the owner. Excess return (abnormal return): Difference between the actual returns on an investment and the expected return. dollars and offered to investors globally. Eurodollar and Euroyen bonds are examples. Equity risk: Measure of deviation of actual cash flows from expected cash flows. is used to adjust the acquisition cost.
equipment. such as plant. 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. 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. depending upon a specified market interest rate (prime or LIBOR). . FIFO: An inventory valuation method. privately run or publicly traded. in a rights offering. Float: Lag between when the check is written and the time it is cleared. retail or service. Floating rate bond: Bond with a coupon rate that is reset each period. Fixed-rate bond: Bond with a coupon rate that is fixed for the life of the bond. Fixed assets: Long term and tangible assets of the firm. and is thus risk that can be diversified away in a portfolio. and engaged in any kind of operation . External financing: Cash flows raised outside the firm whether from private sources or from financial markets. Floor: The minimum interest rate on a floating rate bond. where the cost of goods sold is based upon the cost of material bought earliest in the period.manufacturing. Floating (exchange) rates: Exchange rates determined by demand and supply for the currency. land and buildings. Financing expenses: Expenses arising from the non-equity financing used to raise capital for the business Firm: any business large or small. Fixed (exchange) rates: Exchange rate set and backed up by a government. rather than by demand and supply. Firm-specific risk: Risk that affects one or a few firms. and thus change over time.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). Ex-rights price: Stock price without the rights attached to the stock. while the cost of inventory is based upon the cost of material bought later in the year.
requires daily settlement of differences and has no default risk.Forward contracts: A contract to buy or sell an asset. 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. where the value of a stock is the present value of expected dividends. Forward price (rate): The price or rate quoted in a forward contract. Growing annuity: A cash flow that occurs at regular interval and grows at a constant rate for a specified period of time. it is an agreement to buy or sell an underlying asset at a specified time in the future. generally at a price much greater than the price paid by the acquirer. if the manager covered by the contract loses his or her job in a takeover. Free cash flows (Jensen): Cash flows from operations over which managers have discretionary spending power. growing at a constant rate forever. Goodwill: The difference between the market value of an acquired firm and the book value of its assets. security or currency in the future at a fixed price (specified at the time of the contract) Forward PE: Ratio of price per share to expected earnings per share in next financial year. arises only when purchase accounting is used in an acquisition. often markets will incorporate their expectation of the value of these assets into the market value. However. but before any debt payments (interest or principal payments). Gordon growth model: Stable-growth dividend discount model. Growing perpetuity: A cash flow that is expected to grow at a constant rate forever. it differs from a forward because it is usually traded. Greenmail: Buying out the existing stake of a hostile acquirer in the firm. Historical (risk) premium: Difference between returns on risky investments (usually stocks) and riskless investments (usually government securities) over a specified past time period. Golden parachute: A provision in an employment contract that allows for the payment of a lump-sum or cash flows over a period. Futures contract: Like a forward contract. In return. taxes and reinvestment needs. 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). . Growth assets: Investments yet to be made by the firm.
Implied premium: The premium estimated based upon the current level of stock prices and expected cash flows from buying stocks. Incremental cash flows: Cash flows that arise as a consequence of a new investment. during a period. Income bonds: Bond on which interest payments are due only if the firm has positive earnings.lost sales. Hybrid securities: Securities that share some characteristics with debt and some with equity. drop in employee morale. Inflation rate: Change in purchasing power in a currency from period to period. and the resulting income made by the firm. Hurdle rate: a minimum acceptable rate of return on projects. 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. Inflation-indexed treasury bond: A government bond that guarantees a real interest rate. This amount is usually written off right after the acquisition. 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 Interest rate parity: Equation that relates the differential between forward and spot rates to interest rates in the domestic and foreign market. Intangible assets: Assets that do not have a physical presence but have value (either because they generate cash or can be sold). Subtracting out the riskless rate yields the implied premium. Indirect costs of bankruptcy: Costs associated with the perception that a firm may go bankrupt .Historical cost: The original price paid for an asset. used to determine whether to invest in a project or not. adjusted upwards for improvements made to the asset since purchase and downwards for the loss in value associated with the aging of the asset Holder-of-record date: Date on which company closes its stock transfer books and makes up a list of the shareholders. . Income statement: A statement which provides information on the revenues and expenses of the firm. when acquired. In-process R&D: Portion of an acquired firm's value that is attributed to past research. rather than a nominal rate. 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. tighter supplier credit�. Examples would be preferred stock and convertible debt.
up to the agreed limit. Line of credit: A financing arrangement. under which the firm can draw on only if it needs financing. based upon reputation and national focus. Kurtosis:: Measure of the likelihood of large jumps in a distribution. Liquidating dividends: Dividends in excess of the retained earnings of a firm. 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. Knockout option: An option that ceases to exist if the underlying asset reaches a certain price. Jump price proces: Price process where price changes stay large even as the period gets shorter. It can be considered a time-weighted. Firms that choose the LIFO approach to value inventories have to specify in a this difference. This is viewed as return of capital in the firm and taxed differently. Leveraged recapitalization: Using new debt to repurchase equity and increasing debt ratio substantially in the process. cash flow. Leveraged buyout: An acquisition of a firm by its own managers or a private entity. rate of return on an investment. Lockbox system: System where customer checks are directed to a post office box. LIFO reserve: Difference in inventory valuation between FIFO and LIFO. International Fisher Effect: Specifies the relationship between changes in exchange rates and differences in nominal interest rates in two countries. captured in the tails of the distribution. . Liquidation value: net cash flow that the firm will receive from selling an asset today. reflecting its financial leverage.Internal equity: Cash flows generated by the existing assets of a firm that are reinvested back into the firm. This will change as leverage changes. Levered beta: Beta of a firm. Internal rate of return (IRR): Discount rate that makes the net present value zero. financed primarily with debt. rather than to the firm Major bracket investment bankers: Investment bankers in the top tier. resulting in inventory costs that closely approximate current costs.
composed entirely of risky assets. In most cases. Not necessarily the largest investor in the firm. Merger: A combination of two firms where the boards of directors of two firms agree to combine and seek stockholder approval for the combination. Market value: Estimate of how much an asset would be worth if sold in the market today. Management buyouts: An acquisition of a publicly traded firm by its own managers. this is obtained by looking at the last traded price. that yield the highest expected returns for each level of risk (standard deviation). if the securities represent more than 50% of the overall ownership of that firm. This risk cannot be diversified away in a portfolio. Market conversion value: Current market value of the shares for which a convertible bond can be exchanged. Marginal return on equity (capital): Measures quality of marginal investments. active interest in another firm (more than 50%). Marginal tax rate: Tax rate on the last dollar of income (or the next dollar of income). Mezzanine bracket: Smaller investment banks that operate nationally. the more efficient a market is. rather than average investments. Computed as the change in income (net income or operating income) divided by the change in equity or capital invested. Minority interest: The share of the firm that is owned by other investors. The smaller and less persistent the deviations are. given the cost of selling securities and the interest rate that can be earned on marketable securities. at least 50% of the shareholders of the target and the bidding firm have to agree to the merger. Usually determined by the tax codes. Market risk: Risk that affects many or all investments in a market. The target firm ceases to exist and becomes part of the acquiring firm. If the asset is a traded asset. Miller-Orr model: Model for estimating an optimal cash balance. Marginal investor: The investor or investors most likely to be involved in the next trade on the securities issued by a firm. . for firms with uncertain cash inflows and outflows.Majority active investment: Categorization of ownership of securities by one firm in another firm are treated. Market efficiency: A measure of how much the price of an asset deviates from a firm�s true value. Shows up only in the event of consolidation. Market capitalization (market cap): Market value of equity in a firm. The minority interest is shown on the liability side of the balance sheet. when one firm owns a majority. Markowitz portfolios: The set of portfolios.
active investment: Categorization of ownership of securities by one firm in another firm are treated. Net present value profile: A graph that records the net present value as the discount rate changes. Non-cash working capital: Difference between non-cash current assets and non-debt current liabilities. with little or no risk. Net debt payments: Difference between debt repaid and new debt issued by a firm during a period. rather than specific assets. the lessee consequently reduces the lease payments. Net present value (NPV): Sum of the present values of all of the cash flows on an investment. Net float: Difference between the disbursement and processing float. netted against the initial investment. Near-cash investments: Investments that earn a market return. Negative pledge clause: Clause in a bond issue that specifies that the bond is backed only by the earning power of the firm. 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. and can be quickly converted into cash. Net operating losses (nols): Accumulated losses over time that can be used to offset income and save taxes in future periods. or an expected cash flow that includes the effects of inflation (higher prices for both inputs and output). such as land or buildings. Nominal interest rate: Interest rate on a bond that incorporates expected inflation. if the securities represent between 20% and 50% of the overall ownership of that firm. Nominal cash flow: A cash flow in nominal terms. Mortgage bond: A bond secured by real property. Equivalent annuities: Annuity equivalent of the NPV of a multi-year project. Usually get accounted for using the equity approach.Minority. 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. . Mutually exclusive (projects): A set of projects where only one of the set can be accepted by a firm.
the lessee returns the property to the lessor. Opportunity costs: Costs associated with the use of resources that a firm may already own. Open market repurchase: Stock repurchase where firms buy shares in securities markets at the prevailing market price. At the end of the lease period.Notes: Unsecured bonds issued by firms with maturity less than 15 years. Operating lease: The lessor (or owner of the asset) transfers only the right to use the property to the lessee. This bond will be priced well below par. Option delta: Number of units of the underlying asset that are needed to create the replicating portfolio for an option. 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. Preferred stock: Security that pays a fixed dividend. the higher the proportion the greater the operating leverage. 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. Offering price: Price of a stock at the initial public offering. 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. thus. on total value. Perpetuity: A stream of constant cash flows that occur at regular intervals forever. Payback: Period of time over which the initial investment on a project will be recovered. usually has no or limited voting rights. 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). Operating leverage: A measure of the proportion of the costs that are fixed costs. and has an infinite life. and do not have to offer the premiums required for tender offers. the rights or cash flows on which are triggered by hostile takeovers. PEG ratio: Ratio of PE ratio to expected growth rate in earnings. . which is usually not tax deductible. Poison pills: Securities. and the market value of the acquisition is not shown on the balance sheet. The lease expense is treated as an operating expense in the income statement and the lease does not affect the balance sheet.
Purchasing power parity: Equation that relates changes in exchange rates to differences in inflation. Product cannibalization: The effect that the introduction of a new product may have on a firm�s existing product sales. Processing float: Lag between when the check is written and the time it is cleared. Project risk: Risk that affects the cash flows of a project will differ from expectations. Purchase of assets: An action where one firm acquires the assets of another. Private placement: An arrangement where securities are sold directly to one or a few investors. Purchase accounting: Accounting approach for acquisitions where the market value paid for the acquired firm is shown on the balance sheet. Price/earnings ratio (PE): Ratio of price per share to earnings per share. when the customer is writing the check to the firm. Price/sales ratio (PS): Ratio of price per share to sales per share. if the firm does not have the cash to pay the dividend. often with the intent of taking the company from public to private status. due to estimation errors or unanticipated events. Price/book value: Ratio of price per share to book value of equity per share. and goodwill. but the amount of the payment is determined by the exchange rate between the US dollar and a foreign currency.Preferred stock: Security which a fixed dollar dividend that is usually not tax deductible to the firm. Private equity: Equity provided by private investors to companies. Probit: Statistical technique used to estimate probability of an event occurring. Principal exchange linked bonds (perls): Bonds where coupons and principal are payable in US dollars. though a formal vote by the shareholders of the firm being acquired is still needed. Based upon the assumption that a specific basket of goods should sell for the same price across different countries . the dividend is cumulated and paid in a period when there are sufficient earnings. Profitability index: Ratio of net present value to initial investment in a project. is shown as an asset. Often used when a firm faces capital rationing. Privately negotiated repurchases: Stock repurchase negotiated with a stockholder who owns a substantial percentage of the shares. which is the difference between the book value and market value of the acquired firm.
the nominal component captures expected inflation. calculated based upon the difference between the price at which a security is bought and the price at which it will be sold back. Repo rate: Implied interest rate in a repurchase agreement. Replicating portfolio: A portfolio of the underlying asset and the riskless asset that has the same cash flows as an option. with the same strike price. Repurchase agreement (repo): The sale of a security. associated with inflation. Real interest rate: The compensation. Rainbow options: An option that is exposed to more than one type of uncertainty. Recapitalization: Changing financing mix by using new equity to retire debt or new debt to reduce equity.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. Puttable bonds: Debt (bonds). while the registration is being reviewed by the SEC. where bond buyers are allowed to put their bonds back to the firm and receive face value. Put-call parity: Arbitrage relationship governing the prices of a call and put option. in real goods. Real options: An option on a real asset. the number of shares it intends to repurchase. and the period of time for which it will keep the offer open. 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. that has to be offered to get lenders to postpone consumption and allow you to use their savings. in the event of an occurrence like a leveraged buyout. same exercise price and on the same underlying asset. Real cash flow: A cash flow that is corrected for the loss of buying power over time. Real interest rate: Interest rate on a bond after taking out the expected inflation component. as opposed to a financial asset. Red herring: Preliminary prospectus issued by a firm going public. Nominal interest rate: The compensation that has to be offered to lenders to induce them to lend you money. . Reinvestment rate: Proportion of after-tax operating income reinvested back into the firm. Regular dividend: Dividend paid at regular intervals to stockholders.
Riskless rate: Expected rate of return on an asset with guaranteed returns. Rights-on price: Stock price with the rights attached to the stock. with an agreement that the security will be soldback at a specified price at the end of the agreement period. some positive and some negative. Sinking funds: A fund into which a fixed amount is set aside each year to repay outstanding bonds when they come due. Existing stockholders in the firm receive these shares in proportion to their original holdings. Skewness: Bias towards positive or negative returns in a distribution. at a price generally much lower than the current market price (subscription price). Spin 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 off: Action that separates out assets or a division and creates new shares with claims on this portion of the business. in proportion to their current holdings. Seed-money venture capital: Venture capital provided to start-up firms that want to test a concept or develop a new product. Sector risk: Risk that the cash flows on projects will vary from expectations because of events that affect an entire sector.Reverse repurchase agreement (reverse repo): The buying of a security. Secured debt: Bonds or debt with priority in claims on the assets of the firm. Serial bonds: Bonds where a percentage of the outstanding bonds mature each year. and the maturity is specified on the serial bond. Special dividend: Dividends paid in addition to regular dividend infrequently. cash flows or other variables can be forecast under a variety of different scenarios. . 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. Rights offering: Offering where existing investors in the firm are given the right to buy additional shares. in the event of bankruptcy. Firm usually gives up control over the assets. Safety inventory: Extra inventory cover the demand while an order is being replenished Scenario analysis: Analysis where earnings. in a rights offering.
to reflect its aging. Stock dividends: Dividend that takes the form of additional stock (in proportion to existing holdings) in the firm. Standard deviation: Measure of the squared deviations of actual returns from the expected returns. where the hostile acquirer (in return for a payment) agrees not to buy additional stock in the firm for a period of time.Split up: Action where firm splits into different business lines. in case the actual price falls below the offering price. . Subordinated debentures: Unsecured bond with claims against assets that are subordinated to the claims of other lenders. 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. Subscription price: Price at which a rights offering is made by a firm. over an estimated lifetime. in proportion to holdings in the firm. Statement of cash flows: A statement which specifies the sources of cash to the firm from both operations and new financing. Often used in the context of commodities or foreign currency. and the uses of this cash. Start-up venture capital: Venture capital that allows firms that have established products and concepts to develop and market them. Stand-by guarantees: Underwriting agreement where the investment banker provides back-up support. Standstill agreement: An agreement entered into between a hostile acquirer and a firm. This is the square root of the variance. 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). Straight line depreciation: A depreciation method where an equal amount of the asset is written off each year. distributes shares in these business lines to the original stockholders in proportion to their original ownership in the firm. Spot rate: Current market rate. Stock split: Action where additional shares are given to each stockholder in the firm. and then ceases to exist. 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.
Tobin�s Q: Ratio of firm value to replacement cost of the assets owned by the firm. and the total amount is divided by the number of shares outstanding. Time line: A line depicting the magnitude and timing of cash flows on an investment. This is in contrast to an actual rating that is usually provided by a ratings agency. Generally. the terminal value is the value at the end of the 10th year. Terminal price (value): Expected value of an asset at the end of forecast period. Translation exposure: Effect of exchange rate changes on the current income statement and the balance sheet of a firm with exposure to foreign currencies. including those covered by the options. Tombstone advertisement: Advertisement containing details of an initial public offering. projects or assets were independently run. projects or assets that would not arise if the firms. Trust preferred stock: Preferred stock. The owner is entitled to the earnings and cash flows of the division. government. For instance. Synergy: Increase in value arising from the combination of two firms. structured in such a way that the fixed dividend that is tax deductible to the firm.S. and the names of other investment bankers involved in the issue. Underwriting guarantee: Guarantee of a fixed price (offering price) offered by an investment banker in a public offering of securities. Treasury stock approach: Approach for dealing with options in valuation. Treasury bills: Short-term obligations issued by the U. Tracking stock: Stock issued on a division of a firm. the parent company continues to maintain full control over the division. 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. 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. .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. Synthetic rating: Bond rating estimated using a financial ratio or ratios for a firm. where the exercise value of the options is added to the value of the equity in the firm. Trailing PE: Ratio of price per share to earnings per share over the most recent four quarters. and the stock trades on that basis. if you forecast cash flows for 10 years. the name of the lead investment banker.
Unsecured bonds: Bonds with the lowest claim on the cash flows and assets of the firm. Value/sales ratio (VS). It is determined by the businesses that the firm is in. Up-and-out option: A put option that ceases to exist if the underlying asset falls below a certain price. it is a long term call option on the equity of the firm. Warrants: Securities where holders receive the right to buy shares in the company at a fixed price in the future. Can be computed from the regression beta (top-down) or by taking a weighted average of the betas of the different businesses (bottom-up). when the company can be expected to go public. 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. and the operating leverage it maintains in these businesses.: Ratio of value per share to sales per share. under the scenario that it is all equity-financed.Unlevered beta: The beta of a firm. Variance: Measure of the squared deviations of actual returns from the expected returns. Value ratio: Ratio of PBV Ratio to return on equity of a firm. Venture capital method: Value estimated by applying a price-earnings multiple to the earnings of the private firm are forecast in a future year. .
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